Imagine the existence of prediction markets for grades in Ray's economics class. The weekend before a test, Ray observes a classmate at a party who has had too much to drink. He does not think that she will recover enough to study for the test on Monday. None of Ray's other classmates observes this. How could Ray profit from this information?
A) bet on himself to do well on the exam
B) bet on himself to do poorly on the exam
C) bet on his classmate to do well on the exam
D) bet on his classmate to do poorly on the exam

Question

Quizplus · Accepted Answer

Ray could profit from this information by betting on his classmate to do poorly on the exam, as he does not think she will be able to study and perform well. If other traders in the prediction market do not have this information, they may assume that the classmate will do well and place bets accordingly. Ray can then sell his bet for a profit if his prediction is correct. Betting on himself to do well or poorly on the exam does not take into account the new information he has obtained about his classmate's condition. Betting on his classmate to do well would also not be logical given his observation.

Imagine the Existence of Prediction Markets for Grades in Ray's