Reading Comprehension

PT157 · S4 · P2 · Q13 Wisdom of Markets

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Passage AMarkets, such as stock exchanges, distill the collective wisdom of millions of individuals into a single number, and they do so with amazing efficiency.

Topic

The accuracy and limitations of markets—especially prediction markets—when it comes to gathering and reflecting information.

Framework

Present Debate

Main Point

While markets (including prediction markets) can efficiently aggregate information and often make accurate forecasts, they are not infallible and ultimately reflect the prevailing opinion at a given time rather than any guaranteed insight into the future. **Most Valuable Sentences:** - Passage A: - Passage B:

P1 (Passage A): Markets as Efficient Information Gatherers

Markets (unlike committees or polls) efficiently turn the opinions and knowledge of many individuals into useful predictions or prices, rewarding those who have correct insights.

P2 (Passage A): Example—Prediction Markets

Describes the structure and success of engineered markets like the Iowa Electronic Markets, which use actual money to encourage accurate predictions—sometimes even outperforming polls.

P3 (Passage A): How Markets Rapidly Learn

Explains, via an experiment, how markets can quickly reflect the knowledge of even a small number of informed participants, making everyone act as though they are "in the know" by watching price movements.

13.

Suppose that, in an attempt to manipulate the Iowa Electronic Markets, several people invest large sums in contracts for long-shot candidate X. The price of contracts for X briefly spikes, but well-informed traders promptly sell their contracts for X at a profit, and the effect of the investments quickly vanishes. This outcome would tend to support

  1. passage A, since it shows

    Wrong Emphasis

    We did think that this scenario supported Passage A, but not because Passage A ever said anything like, "Initially unpopular candidates can never have a sustained increase in value". We can't match up that extreme wording with anything in Passage A.

    7% picked this

  2. Correct

    passage A, since it provides

    Why this is right

    In this hypothetical, candidate X was being unfairly overvalued. The well-informed traders knew X's accurate value was lower. Their trading spurred a bunch of other trades that lowered X's value back to where it belonged. The first sentence of A's 3rd paragraph speaks about this: the market as a whole learns -- lightning fast and very accurately -- what informed people know.

    Skill tested: Application · how this choice captures the passage's function is the move to repeat next time.

    56% picked this

  3. neither passage, since the attempt

    Unsupported

    Given that in this scenario the market "figured out" the truth about candidate X, it supports Passage A's beliefs about the wisdom of markets.

    5% picked this

  4. passage B, because it shows

    Unsupported

    There is a thin sense in which the scenario matched B. B claims that markets are moment my moment snapshot of opinion, so in the moments when X had really high value, the market had the majority opinion that X's value was high. But this answer is saying it proves B's point that "a losing candidate can be temporarily ahead of the winning candidate". In the beginning of Passage B, it was saying "how can we call these markets wise / infallible, if the losing candidate was ahead of the winning candidate for almost a year until the last few days". B's point was that if the market can show the wrong winner for 97% of the time people are betting on it, that doesn't seem like a wise market. But this hypothetical is an example of a market that figured out the "correct" value of X.

    16% picked this

  5. passage B, because it shows

    Unsupported

    We could say that the movements of the market, in this hypothetical scenario, reflected the majority opinion, moment by moment, of the investors, and that aligns with B. But the question stem asks us particularly about the outcome to this story, not all the moment-by-moment stuff. The outcome of the trading was that X returned to its "correct" value based on the actions of "well-informed" traders. This is much more telling A's story than it is telling B's story of "a bunch of aggregated opinions that could easily be right or wrong".

    16% picked this

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