Securities Based Decision Markets

TL;DR

This paper introduces a securities-based implementation for decision markets, aligning with scoring rule-based mechanisms, and provides insights into their expected payoffs and practical deployment.

Contribution

It proposes a novel securities-based approach for decision markets that maintains incentive compatibility and expands practical implementation options.

Findings

Securities-based decision markets can replicate scoring rule-based expected payoffs.

Distribution of payoffs may differ between securities-based and scoring rule-based markets.

Provides a framework for intuitive and easy-to-use decision market implementations.

Abstract

Decision markets are mechanisms for selecting one among a set of actions based on forecasts about their consequences. Decision markets that are based on scoring rules have been proven to offer incentive compatibility analogous to properly incentivised prediction markets. However, in contrast to prediction markets, it is unclear how to implement decision markets such that forecasting is done through the trading of securities. We here propose such a securities based implementation, and show that it offers the same expected payoff as the corresponding scoring rules based decision market. The distribution of realised payoffs, however, might differ. Our analysis expands the knowledge on forecasting based decision making and provides novel insights for intuitive and easy-to-use decision market implementations.