Self-Resolving Prediction Markets for Unverifiable Outcomes

TL;DR

This paper introduces a novel prediction market mechanism that incentivizes truthful reporting and effectively aggregates information even when the outcome is unverifiable, by using a reference agent as a proxy for the ground truth.

Contribution

The paper proposes a self-resolving prediction market mechanism that does not require outcome verification, utilizing a reference agent with more information to ensure truthful reporting.

Findings

Mechanism is incentive-compatible and encourages truthful reporting.

The market terminates probabilistically, paying agents based on the reference agent.

The approach is applicable to both verifiable and unverifiable outcomes.

Abstract

Prediction markets elicit and aggregate beliefs by paying agents based on how close their predictions are to a verifiable future outcome. However, outcomes of many important questions are difficult to verify or unverifiable, in that the ground truth may be hard or impossible to access. We present a novel incentive-compatible prediction market mechanism to elicit and efficiently aggregate information from a pool of agents without observing the outcome, by paying agents the negative cross-entropy between their prediction and that of a carefully chosen reference agent. Our key insight is that a reference agent with access to more information can serve as a reasonable proxy for the ground truth. We use this insight to propose self-resolving prediction markets that terminate with some probability after every report and pay all but a few agents based on the final prediction. The final agent is chosen as the reference agent since they observe the full history of market forecasts, and thus have more information by design. We show that it is a perfect Bayesian equilibrium (PBE) for all agents to report truthfully in our mechanism and to believe that all other agents report truthfully. Although primarily of interest for unverifiable outcomes, this design is also applicable for verifiable outcomes.