Implementing Securities Based Decision Markets with Stochastic Decision Rules

Incentivised decision markets are mechanisms that allow selecting one action among a set of actions based on properly incentivised forecasts about the actions' consequences. Existing research on decision markets is based on scoring rules. Because scoring rules based decision markets involve two-side liabilities that can be difficult to track, we here study more convenient securities based decision markets. We present a decision market setting that prices securities using a cost function derived from a scoring rule. In such a decision market setting, traders will have the same expected utility as forecasters measured by the corresponding scoring rule. Moreover, we identify differences between scoring rules based decision markets and securities based decision markets in terms of actual payoffs. Lastly, we describe an insurance mechanism that can shift risk from the market creator to a risk-neutral third party.