Abstract

Abstract. In this paper we study the design and characterization of prediction markets in the presence of traders with unknown risk-aversion. We formulate a series of desirable properties for any “market-like ” forecasting mechanism. We present a randomized mechanism that satisfies all these properties while guaranteeing that it is myopically optimal for each trader to trade honestly, regardless of her degree of risk aversion. We observe, however, that the mechanism has an undesirable side effect: the traders ’ expected reward, normalized against the inherent value of their private information, decreases exponentially with the number of traders. We prove that this is unavoidable: any mechanism that is myopically strategyproof for traders of all risk types, while also satisfying other natural properties of “market-like ” mechanisms, must sometimes result in a player getting an exponentially small normalized expected reward. 1 Introduction and Related Work Prediction markets are markets designed and deployed to aggregate information about future events by having agents with private beliefs trade in these markets. One market

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