Poster
Interpreting prediction markets: a stochastic approach
Nicolás Della Penna · Mark Reid · Rafael Frongillo

Tue Dec 4th 07:00 PM -- 12:00 AM @ Harrah’s Special Events Center 2nd Floor #None

We strengthen recent connections between prediction markets and learning by showing that a natural class of market makers can be understood as performing stochastic mirror descent when trader demands are sequentially drawn from a fixed distribution. This provides new insights into how market prices (and price paths) may be interpreted as a summary of the market's belief distribution by relating them to the optimization problem being solved. In particular, we show that the stationary point of the stochastic process of prices generated by the market is equal to the market's Walrasian equilibrium of classic market analysis. Together, these results suggest how traditional market making mechanisms might be replaced with general purpose learning algorithms while still retaining guarantees about their behaviour.

Author Information

nikete Della Penna (Massachuset Institute of Technology)
Mark Reid (Apple)
Rafael Frongillo (CU Boulder)

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