PrepTest 157

Passage A never claims that initially unpopular candidates cannot have a sustained increase in value. According to passage A, if the initially unpopular candidate has an increasingly high chance of winning an election, their value should increase in a prediction market. Since this is not a claim passage A asserts, this cannot be the correct answer.

Question Type: Application/Hypothetical

Strategy Overview:
Review the main point and any relevant parts of the passage and notes, if necessary, to anticipate what might happen in the scenario described

Answer Anticipation:
This tome of a question stem asks us which passage’s argument would be supported — and why — if some people tried to manipulate the Iowa Electronics Markets. Let’s break it down and try to predict what the correct answer will say.

The particular manipulation described involves many people purchasing contracts for a long-shot candidate. This would lead to an increased percentage of traders owning contracts for the long-shot candidate. If we assume passage A is correct and that markets are actually predictive, this would make this candidate appear to be less a long-shot than they might actually be. If we assume passage B is correct and that markets are just a reflection of the general opinion, this would make it seem like more people thought this candidate would win.

In the second part of this hypothetical, we learn that "well-informed" traders sell their contracts for the long-shot candidate, and the effect of the initial manipulation "quickly vanishes." In other words, the market is corrected by well-informed traders.

To determine which passage this hypothetical supports, we can search (using our notes or, less effectively, CTRL/Command+F if necessary) for any references to "well-informed" traders or "insiders." Passage A includes a reference to such traders in its third paragraph. There, we learn of an experiment in which only a few traders in a fictional market were given inside knowledge. Even though no one else knew who these "insiders" were, everyone watched the movements of the market price. As a result, everyone quickly began buying and selling as if they also possessed this inside knowledge. The author used that experiment to show that markets are remarkably "efficient," quickly spreading insider knowledge.

This hypothetical is very consistent with this experiment. We had the "well-informed" traders acting on insider knowledge and using that knowledge to sell long-shot candidate stock at an inflated price. But if the effect of the manipulation didn't last long, that means that price didn't stay inflated. That would suggest that a lot of other people sold their long-shot candidate stock as well. Which would mean that everyone started acting like insiders, supporting passage A's contention that markets are efficient.

So we should look for the answer choice that says that this hypothetical supports passage A because it suggests that markets are efficient.

Answer Choice Explanation:
This is just what we predicted, and it is correct. This hypothetical supports passage A because it shows that markets are efficient, meaning they disperse accurate information quickly throughout the market.

Key Takeaway:
Prediction helps! Taking the extra beat or two to realize that this hypothetical supports passage A (based on its similarity to the experiment described in the third paragraph) would have narrowed our choices from five to two. Even if we weren't confident about why this hypothetical supported passage A, we could still get the question right once we realized one of those options didn't express a view passage A endorsed.

As discussed in the Answer Anticipation section above, this hypothetical supports passage A. An expert test-taker likely wouldn't read past "neither passage." Moreover, the fact that manipulation was "unsuccessful and short-lived" could support either passage. If the manipulation was short-lived because accurate information was disseminated quickly throughout the market, it would support passage A. If the manipulation was short-lived because people remained convinced that the long-shot candidate couldn't win and acted accordingly, it would support passage B.

As discussed in the Answer Anticipation section above, this hypothetical supports passage A. An expert test-taker likely wouldn't read past "passage B." Moreover, this answer choice seems to suggest that the point of passage B was that prediction markets are inherently inaccurate; however, passage B never made such a claim. Passage B instead claimed that such markets are unreliable because they merely reflect the general opinion (which is sometimes accurate and sometimes inaccurate). And, to point out one final issue with this answer choice, this question stem never said the "long-shot" candidate was the "losing" candidate.

As discussed in the Answer Anticipation section above, this hypothetical supports passage A. An expert test-taker likely wouldn't read past "passage B." Plus, this hypothetical doesn't suggest that the market merely reflects the majority opinion of the population. The price for the long-shot candidate didn't rise because more people suddenly thought the candidate would win — it was just through market "manipulation."