Prediction Markets and Beliefs about Climate: Results from Agent-Based Simulations

Abstract:

Climate scientists have long been frustrated by persistent doubts a large portion of the public expresses toward the scientific consensus about anthropogenic global warming. The political and ideological polarization of this doubt led Vandenbergh, Raimi, and Gilligan [1] to propose that prediction markets for climate change might influence the opinions of those who mistrust the scientific community but do trust the power of markets.

We have developed an agent-based simulation of a climate prediction market in which traders buy and sell future contracts that will pay off at some future year with a value that depends on the global average temperature at that time. The traders form a heterogeneous population with different ideological positions, different beliefs about anthropogenic global warming, and different degrees of risk aversion. We also vary characteristics of the market, including the topology of social networks among the traders, the number of traders, and the completeness of the market. Traders adjust their beliefs about climate according to the gains and losses they and other traders in their social network experience.

This model predicts that if global temperature is predominantly driven by greenhouse gas concentrations, prediction markets will cause traders' beliefs to converge toward correctly accepting anthropogenic warming as real. This convergence is largely independent of the structure of the market and the characteristics of the population of traders. However, it may take considerable time for beliefs to converge. Conversely, if temperature does not depend on greenhouse gases, the model predicts that traders' beliefs will not converge.

We will discuss the policy-relevance of these results and more generally, the use of agent-based market simulations for policy analysis regarding climate change, seasonal agricultural weather forecasts, and other applications.

[1] MP Vandenbergh, KT Raimi, & JM Gilligan. UCLA Law Rev. 61, 1962 (2014).