Bluffing and Strategic Reticence in Prediction Markets ABSTRACT

In a prediction market using a logarithmic market scoring rule market maker, there exist joint probability distributions on signals such that agents have an incentive to bid against their own information—strategically misleading other agents in order to later correct the price. The dynamic parimutuel market suffers from another problem: even with uncorrelated signals, agents may have an incentive to withold information if they believe others may have better signals later. 1