Wednesday, June 13, 2007

Are Prediction Markets Efficient?

I was reading Fred Wilson's post about the information efficiency of the venture capital market.

While reading the posting, I started wondering whether prediction markets are efficient, according to the definition of Eugene Fama. In other words, how long does it take for a prediction market to incorporate all the available information about an event? Liquidity seems to be an issue for the existing prediction markets, preventing them from reaching equilibrium quickly. But if we had enough liquidity, how long would it take for humans to "agree" on prices that incorporate all the available information about an event?