Budget Constraints in Prediction Markets
Abstract
We give a detailed characterization of optimal trades under budget constraints in a prediction market with a cost-function-based automated market maker. We study how the budget constraints of individual traders affect their ability to impact the market price. As a concrete application of our characterization, we give sufficient conditions for a property we call budget additivity: two traders with budgets B and B' and the same beliefs would have a combined impact equal to a single trader with budget B+B'. That way, even if a single trader cannot move the market much, a crowd of like-minded traders can have the same desired effect. When the set of payoff vectors associated with outcomes, with coordinates corresponding to securities, is affinely independent, we obtain that a generalization of the heavily-used logarithmic market scoring rule is budget additive, but the quadratic market scoring rule is not. Our results may be used both descriptively, to understand if a particular market maker is affected by budget constraints or not, and prescriptively, as a recipe to construct markets.
Keywords
Cite
@article{arxiv.1510.02045,
title = {Budget Constraints in Prediction Markets},
author = {Nikhil Devanur and Miroslav Dudík and Zhiyi Huang and David M. Pennock},
journal= {arXiv preprint arXiv:1510.02045},
year = {2015}
}