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Model uncertainty and prediction markets

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  • benjohngate
    Hello, in a Bayesian setting, how can I express known estimation errors? I am working on a problem where I want to model estimation volatility, but also biases
    Message 1 of 1 , May 24 2:02 AM
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      Hello,

      in a Bayesian setting, how can I express known estimation errors? I am
      working on a problem where I want to model estimation volatility, but
      also biases on the estimation and estimation volatility.

      So say I one want to guess who will win the NBA basketball game Boston
      Celtics vs Detroit Pistons this evening. If I am an expert, not only
      will my belief match the objective probability (if it exists at all),
      but I will have a good understanding of how good my guess will be.

      Furthermore say I am trading a contract in a prediction market and am
      estimating how good guesses of other people is. Currently the contract
      trades at .32$ which means the implied probability of the event BC,
      'Boston Celtics wins', is 32%. What is a good algorithm to derive
      other agents' estimation error? I might form the belief that the
      estimation error of the implied probability of BC is ±10%.
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