No, that's not quite true. In the long run in an efficejy market your rate of return (over market average...0 here) can reflect the employment value of someone of your ability spending that much time doing research.
For instance, imagine a market in which people bet on a mathematical hypothesis. If you are a mathematician you can gain evidence about that claim by doing mathematics about it. And you should expect that if you have sufficient capital you can basically recover the value of the time you invested (if you can get more the other investors will hire their own mathematician if less then they won't).
Right, but in your example the market is not yet efficient until the second group hires a mathematician and then the returns approach zero. The first mathematician might be able to make enough money to recoup their time, the second just zeros out the two sides and nobody makes money.
1. There seems to be a confusion between "prediction markets will be accurate" and "prediction markets will be accurate after the fact."
2. The whole point of insider trading is that no one else knows about it. To argue that some insider is trading would be valuable information for prediction markets is both accurate and incoherent.
2. I don't think anyone would know insiders were trading on their market specifically, but there would be a general knowledge that insiders often/rarely trade or that there were weak/strong regulations against it.
I'll try to get back to 1 when I have time; it's more subtle than I have focus for right now. For now, the best I can say is that the accuracy of a prediction market prediction is actually veridically proven only when the underlying event occurs, not when people bet one way or the other.
2. "In fact, knowing that President Biden is insider-trading on a “Will President Biden resign?” prediction market should only increase your confidence in it getting the right answer!" That looks an awful lot like a claim that someone would know that an insider was trading.
With #2 it looks more like "if an insider trades on a prediction market, this makes the prediction market more likely to be accurate, whether or not you know about it (since the insider knows the true result and is incentivised to move the market toward it); however, this means that if you *do* know about a particular insider trading on a particular prediction market, your *assessment* of that specific market's accuracy should increase relative to your prior".
>For now, the best I can say is that the accuracy of a prediction market prediction is actually veridically proven only when the underlying event occurs, not when people bet one way or the other.<
Sure, but — so what?
That is, for a given definition of "proven", you can make an argument like this against almost any sort of attempt at knowledge:
• "A study is only proven accurate when a meta-study confirms it." • "An ETA is only proven accurate when the item actually arrives." • "A poll is only proven accurate when the election turns out the way it had indicated." • Etc., etc.
But: that doesn't mean these are not useful tools, nor that they are not / cannot be accurate! (That is, "useful/accurate *relative to available alternatives*"; e.g., simple guessing or auspicy.)
Indeed, what's left, if we apply such a standard universally? Would one argue against the utility of, say, UPS producing an "Estimated Delivery" date for customers — data-driven, sure, but of *unproven* accuracy up 'till the event itself occurs?
Yes. Yes, one would, because UPS "Estimated Delivery" dates are complete garbage and those morons could fuck up a wet dream.
...But still, if I'd chosen a better example, you'd see what I mean, right?
What claim beyond "this is more accurate than most other ways to make predictions and can be useful even if not infallible" do you see us as making?
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One can obtain a good sense of how accurate the market's conclusion is likely to be, if there is some worry about this:
★ Look at how many 70c "shares" turned out to occur. If roughly 70% of them did...
★ Do the same for other questions and prices until satisfied of accuracy. This has been empirically demonstrated elsewhere to *my* satisfaction already, of course; but if it turns out that *you* discover otherwise...
★ Well, then: If so — if you find the markets to be consistently inaccurate — you can make money!
★ ...and if you can make money, so can others. And if everyone is buying in such a way, we have price pressure in the direction of the more accurate prediction/price.
★ Hence, we—... Okay, okay, you've got it from here, I'm pretty sure!
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>That looks an awful lot like a claim that someone would know that an insider was trading.<
I don't think so. User magic9mushroom, above, explains it excellently and in the same way I understood the entry; but since I (vainly) feel compelled to add a separate attempt here anyway:
The point being made works whether or not one can determine if insider trading is occurring, so a yea or nay there is not really important to Scott's argument: if you can, cool, you know it's more accurate than usual; if you can't, cool, there's no reason to worry, because see previous clause.
In other words, whatever your contention re: how knowable insider trading would be, Scott can shrug and say "okay, sure" without affecting the main thrust of the section, which is only really about the effect on pricing.
An insider trade always reveals information, because their trades shift the market towards whatever the insider knows will happen.
The only question is whether the gain in information is worth the loss from non-insider traders quitting in disgust because they keep ending up on the wrong end of an insider trade.
No, the point of insider trading is to use information not available to the general public. It is the illegality of using insider trading in stock market for example, that leads to it being hidden from others.
I don't know about 'canonical', they're subject to manipulation too. I think they're useful as an additional source of information where people involved have real 'skin in the game'.
"Canonical", here, means that sufficiently-liquid prediction markets can't stably disagree with each other due to the arbitrage issue. They can be wrong, but all of them will be equally wrong, so there's a "canonical" prediction market answer.
(That is, if you manipulate one prediction market with loadsamoney, you'll indirectly move all prediction markets about that issue, because people will arbitrage the manipulated market with others and so you'll wind up soaking all of those others as well.)
I wonder how one would go about determining this. Scott's manipulation attempt was about very low-stakes scenario about random Manifold person getting charged with a felony. Maybe manipulating that information is genuinely worth only of some 200 USD, for Scott. However, value of manipulated information about a high stakes political outcomes could be plausibly worth billions. (Say, war in Ukraine: think of price of high tech weapons, value of assets under stake, and then of course, the cost of all involved human life.)
Alternatively, if there exists some other market (say, an insider trade of Ukrainian chocolate factories or high-tech weapons stock futures) where the information is more valuable than the currently available prediction markets, a person with the valuable information would be advised to trade on the other market.
My point is that if one can actually trade on these markets (i.e. you aren't just hacking the market to say the price is X but not letting people take the other side, you're actually trading it at X), then manipulating, say, the Polymarket "will China invade Taiwan in 2023" question with billions of dollars would manipulate all "will China invade Taiwan in 2023" questions in other prediction markets (e.g. Kalshi) by proxy as people repeatedly arbitrage away the difference and you pour more money in to maintain the peg on your directly-affected market; all the prediction markets still give the same answer, it's just a wrong answer.
(In the specific case of China/Taiwan there are semi-plausible perverse incentive issues related to the uselessness of money if you die in a nuclear fireball. But my guess is that there'd be enough time for the market to resolve and you to spend the money before ICBMs start getting thrown, so it's not as fully perverse as "will there be a nuclear war" (which won't resolve YES until too late). In any case, you get the idea.)
Not disagreeing. My comment was less a direct reply and more a tangential pondering about what happens when the prediction markets are small or illiquid compared to value of prediction.
A limited nuclear war might not kill *everyone*, and someone far away from major targets might be able to profit from starting one and survive to enjoy their winnings. There are also numerous people who might enjoy seeing urban centers destroyed for ideological reasons.
Are you talking about insider trading, rather than the "prediction market stably doesn't give the right answer" issue I was referring to (along with manipulation)?
One point regarding the "will there be a nuclear war" market is that generally, like most businesses, prediction markets are headquartered in major cities; if the prediction market's records are destroyed before the market's declared resolved, you don't get paid (and if your bank's destroyed before you can physically cash out or pay for the stuff you want, again, it's useless). And, indeed, "a place away from a city" and "emergency supplies" are the things I was implicitly referring to when I said there'd probably be enough time to spend the money for a "will China invade Taiwan" market.
It's fairly hard to start a nuclear war deliberately, and there'd be a significant risk of hyperinflation and/or asset seizure in a bunch of jurisdictions on top of the "do you even get the cash and/or survive to spend it" problem, so I think the "every prediction market is also an action market"/insider-trading issue is relatively minor - the financial incentives don't work very well, and a prediction market only actually helps achieve something you want for ideological reasons insofar as it lets you give *other* people financial incentives.
I'm pretty sure I lifted the hierarchical court system, where each court is theoretically a prediction market about what the next higher-up court will say, up until you reach the Court of Final Settlement (Supreme Court), from somebody else. Possibly even Robin Hanson.
How about refining it with prioritization by transaction volume rather than selecting randomly? Or perhaps alternating, ruling on a case with the most at stake on odd-numbered days, then on even numbered days resolving whichever is currently trading closest to 50/50. Goal being to focus the court's scarce attention on matters of consequence and uncertainty, thus providing the least noise and most value per unit of judicial signal... and incidentally make market manipulation even more self-limiting than normal, since the harder someone tries to buy an unjust verdict the higher that case would drift toward official attention.
I have a strong intuition that "people who have money to spend on prediction markets" and even more "who also have an interest or knowledge of prediction markets" is an incredibly biased sample of people.
I'm just very pessimistic on the ideal vs the practice. The same kinds of negatives I consider for the stock market. Or markets in general. Prediction markets depend very strongly on right wing economics being accurate imo.
There are some cases where the equilibrium answer for a prediction market with perfect information is not the same as the true probability of the underlying event.
"The US undergoes 1,000,000,000x inflation by 2030", denominated in USD, is one of the obvious examples; if you assume for the sake of argument that this is a 1% chance and that everyone knows this, the equilibrium price for a contract that pays out USD$1 on YES is far less than 1 cent (because if YES is true, USD now is worth at least a billion times USD when the contract pays out, while this is not the case if NO is true).
Similarly, the price of "will the world end" is $0 on a standard prediction market because a resolution as YES prevents you from collecting. The same is true of "will the records of this prediction market get lost", which means a lot of extremely-disruptive things (e.g. nuclear war) don't show up in prediction markets.
Check the Wayback Machine; that section was added after almost a day. Substack doesn't give me exact timestamps, so I can't say for certain that it was after I said that, but it's pretty likely.
Also, I wasn't responding to the post directly, but to a comment making the argument that mispricings are necessarily exploitable.
The absolute gains will be smaller if you don't have much money but the relative gains should be the same. If you can double your money every six months, that should hold true whether you bet $10,000 or $100.
Actually, your rate of returns should go down the more money you put into prediction markets since you'll move the price.
My main question whenever I read about prediction markets is: why are they necessary? The best answer I can surmise from *light* googling is that it can serve as the most accurate representation of the wisdom of the crowd. Is that a good one-sentence answer to the question: "Why prediction markets?"
Interesting... so sort of like a way to cut through any propaganda or BS.
Example: Mainstream media/ideology is that X won't work, but everyone betting in the prediction market says X will work, since that's a more realistic indicator of the assumed body, it's more likely X will work?
Sort of. People have different biases, and when you take a large number of people without selecting for any bias relevant to the prediction market, then you get a lot of biases cancelling each other out.
It is similar to how if you ask individuals to estimate the number of marbles in a glass jar, they display wild variance, but if you average the estimates of individuals, the aggregate usually performs better than most individuals.
Except when people are putting down money because they want to make more money, and not because they hold a strong belief towards a particular prediction
Accurate and trusted, establishing common knowledge in the long run.
If someone doesn't trust it, they can make money. If they just claim they don't trust it, they won't be believed unless they put their money where their mouth is, and people become instantly less tribal and stupid when their money is on the line.
>As a test, I tried to manipulate the market on whether Austin Chen, founder of Manifold Markets, would be charged with a felony.
If I recall correctly, you did this with his explicit permission? It would be worth having that fact displayed next to that sentence if so, since otherwise this reads as a minor alarm bell.
Thanks for writing this! If only we could tag Rostin Behnam :P
In addition to betting on Manifold, ordinary folks in the US and abroad should also participate in the markets on Kalshi, Polymarket, Insight Prediction and PredictIt. Real money is the ultimate play money, as a reputation system that most freely transcends the prediction platform. You don't need to be a hotshot prediction expert - skin in the game allows you to learn quickly about your interest.
To promote prediction markets from a regulatory standpoint, the CFTC cares about the economic purpose of these prediction markets, namely their use to hedge risk and serve as a price-basing mechanism. Directly using these markets for information or to hedge risks and demonstrating a positive economic effect to your life and business is a central legal argument to getting these markets approved!
I had a concern with prediction markets that I think answered myself. Still posting it here for edification and potential correction if my answer was wrong.
> One concern I've had with prediction markets that this post doesn't address: is it good to expand the set of things that companies can hedge against?
> Let's say that I'm Satya Nadella and I'm worried that a startup might disrupt and take over Microsoft Office. Today, I can action that worry by investing into Microsoft Office, investment that presumably makes Microsoft Office better, increases the productivity of its users, and therefore raises the GDP of the human race.
> Let's say we live in Scott-topia and that I'm Satya Nadella and I'm worried that a startup might disrupt and take over Microsoft Office. I might decide that instead of investing in Microsoft Office and reducing the dividends paid to the shareholders that employ me, I'll buy a large stake in "yes" for the prediction market "[w]ill Microsoft Office make at least x bajillion dollars in fiscal year 20XX?" so I'll be set no matter what.
> To phrase my objection more cogently: what propels our society forward are the holes in the efficient market hypothesis; the innovations that are not priced into asset prices. Will large companies ability to hedge against those reduce the incentive to create and fund those innovations?
I think the answer to this objection is that the startups/VCs will take the opposite end of the trade with Microsoft and it'll end up being a massive waste of time for everyone involved (since they could just invest the money in their products) so they won't do it.
> I might decide that instead of investing in Microsoft Office and reducing the dividends paid to the shareholders that employ me, I'll buy a large stake in "yes" for the prediction market "[w]ill Microsoft Office make at least x bajillion dollars in fiscal year 20XX?" so I'll be set no matter what.
Do you mean "buy a large stake in 'no'"? If they bet on the prediction market that their main business will go well that's the opposite of hedging.
Hedging like that seems pretty dangerous though- if you drive up the price for "Microsoft Office gets disrupted" in the prediction market, that seems likely to hurt you in the regular stock market.
It is unlikely that the size of the market for Office to make X bajillion will ever be comparable to X bajillion and not 1000 smaller. Also, if market participants were aware that this market could be used by Satya for this purpose, they would quote pretty lousy odds for any size.
In general, market liquidity exists in size only if either 1)there are large participants naturally on either side of the market, like oil futures market is big because oil producers are naturally long and oil consumers are naturally short 2) the market can be hedged to a decent degree with an already liquid instrument.
People can already short Microsoft as a whole. Enabling them to, in essence, short Microsoft Office doesn't seem like it'd make that much of a difference?
There is a large market in MSFT shares and derivatives on them. There are many natural buyers and sellers on this market, e.g. investors who want to hold more or less of MSFT. If Office is a relatively small part of Microsoft business, shorting Office requires an entirely separate market , one that cannot be hedged well in existing markets. I do not see many natural buyers or sellers for this market, so I do not think this market could grow to a scale comparable to market in MSFT shares.
"Finally, I envision that someday people who want to know the answer to specific questions can subsidize prediction markets on them. For example, the Democratic Party might subsidize a market about which Democratic primary candidate is most likely to win the general election."
-- how would this market resolve? Only one person is going to get a chance to win the general election.
Interesting. I followed the link in 5.1, and got to the part which uses your own unbanning decisions as an example, because the world is a loop. Anyway, the example there suggests that in the Democratic example you would avoid a bunch of failures/distortions by not announcing in advance that the outcome of the set-of-conditional-markets will influence the selection of the candidates, which is a slightly disturbing situation because the whole system generally relies on everything being transparent.
I'm not crazy about the first sentence "Prediction markets are like stock markets, but for beliefs about future events." There are two crucial differences: most prediction markets have binary outcomes and they resolve at some point. This is not the case for the stock market. While most Americans are not familiar with binary options, I don't think using the stock market as an analogy is accurate enough. I'd just compare it to sports betting, even though if it may come with a slightly negative connotation.
Also, a slightly substandard stock market investment will likely still make you money in the long run, while a slightly substandard prediction market "investment" will lose you money. This is the difference between investment and speculation, and non-experts should always avoid speculation.
This whole FAQ seems to *at the same time* claim that prediction markets make the best predictions possible, *and* that there's money to be made by beating the current state of the prediction market. I can't see how these views are compatible.
One thing that annoys me about this article is the recurring thing about "if I'm wrong you can get rich quick", which I realize is sort of "a bit", but also feels like a taunt. "Well, if you're right, you could make money so stop arguing." No, if Scott [et al] is wrong, he's wrong, and whether I make money from it has nothing to do with it. (Also, it's going to be "place positive-expected-value bets that resolve over maybe years", not "get rick quick", but like I say, I know it's a bit.) I distinguish this, emotionally, from "if the market is wrong people will bid it towards correctness", which is intrinsically part of the argument.)
> This whole FAQ seems to at the same time claim that prediction markets make the best predictions possible, and that there's money to be made by beating the current state of the prediction market. I can't see how these views are compatible.
They become compatible when beating the current state of the prediction market is impossible, because the consensus is accurate. You're correct that these are diametric forces governing the market dynamics - the equilibrium determines the size of the market. Present status quo, markets seem to get it right within a few percentage points and the people who consistently make money there aren't making more than a typical software engineer.
Overall, coarse grained efficiency is compatible with fine grained mispricing -- indeed, it is betting on mispricings,and therefore erasing them, that keeps markets efficient.
Conversely, stock markets ARE for beliefs about future events (specifically, future stock prices), so the "but" doesn't make sense here. The differences, instead, are those Lech lists.
Not exclusively - there's also the dividends, and while to an extent this is a belief about the future as well (the company will actually pay dividends), this is at good odds. As is "we can expect the economy to grow".
This is why stocks are (typically) investments, while prediction markets (as well as gold and futures) is mostly about speculation (although futures have other uses, like in controlling risk).
You could frame it as: the stock market is like a prediction market, where people are trying to estimate the price of a share of a company.
The resolution in a prediction market is binary but "price of a share of a company" is not resolvable in a static fashion, because the company itself changes. At one point in time, a company might have been undervalued, and it'd have made sense to buy more stocks of that company. 10 years later, the board has changed, the leadership has swapped companies, and they're dealing with new competition. Now the problem of estimating the price of a share has a resolution again, but one different to the resolution 10 years ago. So, in stock markets, we do have resolutions, just dynamic.
- Much of this just seems like "efficient markets hypothesis" repeated in different ways. Is that not right? Is there a reason to think it'll be more accurate than the stock market's predictions? The only one I saw is the point about how prediction markets can't have a ponzi scheme go on forever, but that applies to certain stocks as well, and doesn't seem like a super broad objection in any event.
And the thing is that (1) I don't think most people would call the stock market "accurate" or "unbiased" except perhaps in a hypertechnical sense, and (2) the stock market needs a lot of TLC to make sure it works properly. There's insider trading, but that's hardly the only example. In fact, to go back to the crypto thing, part of the objection and the reason (allegedly) that it seems like such a shitshow is that they DON'T have the regulations the stock market has.
More generally I bet a bunch of economist PhDs have written a lot of useful shit about the efficient markets hypothesis, that this could probably benefit from some engagement with, if I'm right about this being similar.
- Is the idea that prediction transactions will be public? There's all this stuff about how you can follow Nate Silver's lead, but does Nate Silver have to reveal who his bets? What if he's just quietly sitting there, anonymously betting, not making enough money to have anyone notice?
- I think "in the long run" is perhaps a larger qualifier than people are assuming. To take presidential elections again, they are every 4 years, and the political landscape changes over time such that there's never all that big a sample size of analogous presidential elections to the current one. If Nate Silver is the best predictor (to go with the analogy, not saying it's true), maybe his biases simply match the current landscape and it'll be different in 8 years, or maybe given the small sample size (4 elections?) and the inherent uncertainty of judging percent predictions for binary outcomes it's simply hard to say who is best.
- As a test, I propose something other than big picture geopolitical developments that people normally associate with prediction markets. Sports! Much higher sample size (2430 regular season baseball games per year, and that's just one sport, and the outcome is numerical and unambiguous!), and there's already a lot of predictions out there you can compare to. Compare the sports prediction market to Vegas money lines/odds, pundit predictions, etc.
Prediction markets AFAICT have (in theory) an advantage over Vegas odds, which is that the house edge probably negates the positive EV from certain arbitrage strategies, which probably makes them less efficient in theory.
- Regarding the "zero sum" point, can't you take the money from the primary (i.e. not secondary) purchasers of prediction "shares" (or whatever you call them) and invest them in US government bonds, and the interest is paid out proportionally to the winners?
Sports betting market _are_ prediction markets, in that sports books respond to misprices (as revealed by imbalanced betting) by changing their odds -- either the actual point spread, in those cases, or the price to buy one side or the other. You're right about the house edge making it harder to exploit mispricing, though. Hell, in horse racing, the house edge is 17% on win/place show betting! More typical sports betting is about 5%.
"... suppose that an import-export business spends millions of dollars betting that Trump will lose in order to hedge against his protectionist policies ..."
Wouldn't that business want to bet he would *win*, not lose? (That is, if the policies of Trump's main competitor would be more beneficial, on balance, for that import-export business.)
If Trump wins, the business would presumably lose some revenues and profits due to his policies. But winnings from their prediction markets bets on his election victory could at least partly offset that.
(If I'm confused and have misunderstood this, welcoming corrections!)
Investing wide, like an index fund, or for non-Americans a global index fund, does have the added advantage (on top of being cheap) of removing yourself as far as possible from the risk of market manipulation and insider trading. You make yourself harder to exploit.
I think that, in the ideal case, prediction markets will work as you say, and that would be a good thing. Likewise, in the ideal case, cryptocurrency would also usher in an era of decentralized prosperity, and that would be a good thing too. But in practice, as soon as large sums of money (even virtual money) is in play, the entire utopian landscape shatters into a hodgepodge of Ponzi schemes and general fraud. This is the case with cryptocurrency; this was the case with the stock market; and this will be the case with prediction markets if they ever gain enough popularity to be useful.
In the case of the stock market, the problem was somewhat improved by regulation. There are still scams and clever get-rich-quick schemes, only now they have to be a lot more clever, and perhaps valuable enough to buy off a regulator or two. The stock market sort of works, but it would be foolish to claim that the value of every stock accurately reflects the true value of the company it represents.
Sadly, I don't think prediction markets will ever get even to that level of accuracy, because the incentives are much more entangled. Arguably, a share of "Joe Biden will win the election" is, indirectly, a lever that someone can pull to influence the election; thus, regulators with their thumb on the scale would wield considerable power. Selling the election on the conventional stock market is much more difficult (if not outright impossible).
Is it that much more difficult? You can buy or sell a package of stocks based on things that the candidate/candidate's party has said they'll do if they win the election. Coal mining companies' stock goes up if Republicans win, down if Democrats win. Same for renewable energy companies, anything that one party has talked about putting tariffs on, health insurance companies (stock goes way down if single-payer is instituted, up if individual mandate is enforced, etc.), etc.
This is incredibly and informative and well written. However, to the extent that I find prediction markets objectionable, it has very little to do with their predictive power, and more to do with the aesthetics of how the analysis is presented. I frequently, both here and in other rationalist spaces, see potential human disasters referenced in terms of prediction market odds. Whether it be numbers of future Covid deaths, mass shootings or the likelihood of Putin launching a nuclear weapon, someone is bound to bring it up in the context of prediction market odds, and those odds, definitionally, are defined by people who are framing the possibility of vast human suffering preliminarily in the context of whether they can make any money out of it.
I understand that the predictive power of the markets still have value in these cases, but even so, there's an "ick" factor I can't get past. It feels like reducing potentially devastating events to data analysis/investment opportunities without acknowledging the human toll plays into the worst stereotypes about the rationalist community.
I don't think this is weirder than eg citing a paper written by an academic who hoped to get promoted for it, or calculating the odds on a computer that someone at Microsoft or IBM got rich for inventing, or reading about them in the New York Times knowing that your subscription money is going to the Sulzberger family. You just accept that people have incentives and you trust them if the incentives are aligned with getting the right answer.
To be honest this seems horrifically misguided to me. The purpose of prediction markets is to get information about the likely hood of these events. In the case of disasters having more such information is essential to mitigate or prevent them. The fact that you could, in theory, make money by participating seems to me to be entirely unimportant by comparison.
Opposing innovations that will help save lives for purely aesthetic reasons plays into to the worst stereotypes about people who are ignorantly anti-rationalist.
I get it, and I should clarify that I'm more put off by the general discourse around prediction markets than the markets themselves. This is one of those things I would not have even bothered commenting on if I'd seen anyone else echo the same sentiment beforehand - it just feels like *somebody* should bring it up.
As to your last point, I guess I do feel like the rationalist community has issues with how it is perceived by the broader population, and, in general, somewhere between a reluctance to, and a principled stance against, modifying its behavior to address this perception. Which I get, but I also think that perceptions *do* matter, especially if we want to convince other people to join our community who may otherwise be put off.
I think pushing this point any further would risk some maybe legitimate accusations of "concern trolling", so I'll let it go at that.
I'm quite torn on this. I do think that perceptions matter and that there is value to trying to improve other's perceptions of this community. On the other hand, most criticisms against rationalism/EA/prediction markets/whatever are so *completely* illogical, that it seems mostly out of our hands.
For example, in the wake of the SBF implosion, Effective Altruism got a lot of bizarre and irrational criticism. I heard many people say things like "I agree with the ideas of Effective Altruism, but find it troubling that the first step is to get rich". Apparently none of the people saying that thought to check if the first step of Effective Altruism was actually to get rich. To the best of my knowledge this is not a view that is espoused by any Effective Altruism organization or public figure, not that it matters to them. Arguing against people making these sorts of strawman arguments is completely counterproductive, and that probably accounts for a lot of the reluctance to address perceptions.
Given this environment, it is hard to see how to actual make progress on the PR front. If you had specific ideas about how to solve these problems I suspect that they would be very positively received, but I'm not convinced its really possible.
I also think that suggesting people are excited about prediction markets because it would enable them to get profit off of tragedy is inaccurate and therefore more similar to the EA criticism example above than actual actionable advice about improving our perception, although I suppose I could be wrong.
You draw comparisons between prediction markets and stock markets, but I’m curious if you think sports betting is another useful analogy. The global market for betting on, say, the World Cup outcome is probably orders of magnitude larger than any of the relatively niche prediction markets you highlight. Based on these answers, I would expect one of four things to be true:
-The betting market is an accurate, unbiased representation of which team is likely to win.
-The betting market has a consistent, material bias, so Goldman Sachs hires quants who are experts at soccer to take smarter bets, make tons of money, and correct the market.
-The betting market has a consistent bias, but Goldman Sachs isn’t exploiting it, so there’s a ton of money on the table that someone could pick up tomorrow (or at least in 2026)
-The betting market has a consistent bias, but it’s not viable or worth it for anyone to correct it (like the prediction markets you mentioned today)
As far as I know, option #2 isn’t happening. I could be wrong, but I’ve never read outrage bait stories about how Wall Street won big by betting against America or something. And if this is just because of regulations, I’d still expect someone to try it by setting up shop in the Bahamas.
If option #1 is the case, do we see the benefits you predict? I’m not well versed in the world of sports, so this is an honest question. Do team owners look at Draftkings picks to decide which players they should keep? Do coaches see terrible odds against their team and decide to change strategies before they even play? If so, this seems like a strong argument in favor of prediction markets, and one you might want to highlight in another revision. But if not, I’m curious why you think these markets aren’t living up to their potential, and whether you think this is a counterpoint to your optimistic take on what markets can do.
If option #3 is the case, why aren’t you making tons of money on Draftkings? And if it’s option #4, then what problems do you think are holding back sports betting markets, and why don’t you think other prediction markets will suffer the same fate?
(I suppose option #5 is that this is a flawed analogy, or that I’m missing another obvious takeaway.)
It's also just not very usuable information for team managers. E.g. if I'm a coach and I see that we're 30% underdogs vs the 70% favourites, I could change my strategy... but then again, there's no reason to expect that a different strategy would change those numbers in a favourable way, and I picked the current strategy because I thought it was the best one.
I wonder if it would be legal to have conditional sports betting, eg "What are the odds that the Sharks win the game if they use Johnson as their starter?", "What are the odds that the Sharks win the game if they use Smith as their starter?", etc.
I think it'd depend on the state. But I'd guess there's no particular reason that would be different from betting on a general game outcome. Though I'm not aware of anyone who actually does this. But I don't see how it's materially different from (as does actually happen) betting on things like how many points will be scored by specific players.
The bigger issue is what happens to the betters when the scenario doesn't occur.
In baseball betting, this is actually the default case. Most baseball odds I see are conditional on the listed pitcher actually being the one who starts, and the bet is refunded if they don't (due to late-announced injury, usually.) You can also (sometimes?) bet on "regardless of who starts", but the pitcher is such a large part of baseball success that I don't why you'd bet that unless you had inside info or something.
This has the same problem with causal direction as a lot of conditional markets: if the Sharks' opponent knows that the Sharks will start Johnson or Smith depending on the outcome of the prediction market, the Sharks' opponent will change their strategy accordingly. To give an extreme example for clarity: imagine a predictions market on whether you'll win a rock-paper-scissors match conditional on having played rock, paper, or scissors, which your opponent can see operating and participate in.
I'd disagree, the inputs *into* the 30-70 figure are highly usable pieces of information for coaches and upper management.
Like the models gambling houses/analytic syndicates use to predict performance are basically exactly the same as what sophisticated teams are aiming to do in house. At least in football, and I assume NBA is the same. Knowing that X team performs better when Y player is playing rather than Z is valuable for both gamblers, bookies, and coaches for example.
There are quants who consistently make money at sports betting. But there's not a ton of money in it and the kind of people who can do it usually have more lucrative option. In part because banning it has made the market relatively small. In more sophisticated markets, mostly those where gambling is unambiguously legal, the best quants are employed by the gambling houses to prevent such edges from occurring. (Or rather, to provide the house itself with the edge.) The house can usually outbid independent actors in the long run.
As to why sports teams don't pay much attention: most leagues make any involvement with gambling extremely against league rules. Most prefer not to risk their careers by even being around the gambling houses. After all, they're making a lot of money just being players/coaches/etc. Why risk an ethics investigation?
In short, they're not really comparable unless prediction markets really are acting as casinos with the house offering specific odds generated by internal quants. Sports betting and casinos have an entire third actor, the house, that is absent from the stock market and should be absent from a good prediction market. Additionally, executives in business are allowed to hold stock (modulo insider trading rules) meaning they're under a less strict regime than sports managers. In part because stock ownership aligns incentives while allowing a team's manager to place bets can only unalign incentives.
Unlike a true prediction market, which is zero-sum, sports betting is pretty much always negative sum, that is, you can't make a bet and its inverse for some outcome and come out even. Bookmakers offer worse odds than would be "fair", and would probably ban anyone who for some reason is still able to win big consistently, so this is basically pure gambling.
Sports betting in the UK is negative sum, as @Xpym pointed out
Places like Betfair Exchange don't make money by overpricing flat bets like a tradiitonal bookmaker e.g. quoting 7/1 (12.5%)when true odds are 6/1 or something, but instead by charging a 5% cut on the profits made by people betting on the market.
Often due to low volume some individual markets fall into 4, cat 2 definitely used to happen more but now happens much less as the smart money came in, and cat 1 is now the default.
In fact, two of the smaller Premier League teams most associated with the belated (vs US sports) analytics wave in football, Brighton and Brentford, are owned by men who made their fortunes gambling professionally. The skill set needed is basically identical, predicting future performance in order to either maximise it or maximise earnings on gambling.
Their edge (alpha I suppose) is now smaller than it used to be, but they can punch above their weight due to better recruitment, set pieces, and finding arbitrage opportunities on the player transfer market by shopping from smaller countries.
I said something similar in my top level comment, but I think it's option 4, and the reason it's not viable or worth it is that the betting generally happens in places where there is a house edge.
So lots of arbitrage opportunities are better than "the market" but still not good enough to be positive EV.
(not that I'm necessarily bullish on prediction markets in general or the idea that teams can use them as a source of info)
I believe #4. Sports market predictions a) aren't unbiased (the people betting very often don't just try to maximize their gains, bit instead bet on "their" team in order to increase the excitement of watching the match), and b) are wide-open to corruption by rigging matches.
EDIT: My comment below is about the Forex market rather than sports betting, so it doesn't speak to your point. Leaving for posterity/accountability.
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When Liz Truss announced her rather 'brave' UK budget earlier this year, hedge funds bet substantially against the UK by shorting GBP, including those based in the UK.
I can't immediately find outrage bait, but anecdotally I remember there being a decent amount of it (though significantly more reserved for the government).
I want to preface this by saying I like prediction markets and think they are a net good. But I think there are some clear problems with them that you've missed or hand-waved away in a fashion I don't find convincing.
For example: "4.2: Would prediction markets encourage harmful or illegal activities? ...I think the strongest evidence against is that this basically never happens in stock markets."
I think this is an awfully rosy image of stock markets. Because of many traumas over many decades we've built up complex systems of financial regulation that make stock markets less prone to exploitative harmful schemes than e.g. crypto is - but the natural state of a financial marketplace is to be scam-infested.
So it's illegal to run a "pump and dump" scheme in the stock market, but there's no such prohibition on doing it in a prediction market. Once real money starts going into these markets, you'll definitely see people doing things like buying up a bunch of shares in an outcome, creating fake hype to get people to believe that it's a real market trend, and then dumping their shares at an inflated price before reality sets in.
And of course there's any number of other market manipulation tactics that are known. You can set up a government agency to police these, and it might even work some of the time, but do bear in mind that the Securities and Exchanges Commission has a $2.5 billion annual budget. It's not enough to say "pump and dumps are banned", you need to have people with the job of prosecuting them, and that cost is not negligible. It might be worth it! But it's not negligible.
I also think that in "4.8: “Meme stocks” like Gamestop and AMC sometimes remain mispriced indefinitely. How do we know this won’t happen with prediction markets?" you don't adequately account for the "Market can stay irrational longer than you can stay solvent" effect on markets with resolution dates long in the future, or conditional resolutions that are likely to not be met. You mention these sorts of concerns elsewhere in the FAQ, but don't apply them to the failure mode where they are relevant!
Personally, I think it's absurd that Tesla is valued higher than all other automakers combined. But I don't short Tesla because I don't have any way to prick the bubble and force the stock price to reflect Tesla's real value as a company. There's no moment of truth - I could think the market is deluded, be correct that the market is deluded, and lose all my money betting on the correct value because it takes too long for the market to realise I'm right.
Now, betting on an election outcome in a couple of months doesn't have that problem - we know that the tide is going to go out and we'll get to see who's been swimming naked. But betting on, say, which candidate is more likely to win if nominated DOES have that problem.
Suppose the market is convinced that Clinton will be a stronger nominee than O'Malley. I'm Matt Yglesias, I'm sure that O'Malley would win, and I also happen to be right. But O'Malley never gets close to the nomination, and my correct belief never has the opportunity to be proven true. The market stays mispriced until it expires. My correct bet lost me money, and the market never accurately reflected the reality that O'Malley Would Have Won.
Now, these are sort of edge-case scenarios and I do agree that prediction markets are very good in modal cases. But I also think the edge-case problems are real.
You said basically everything I wanted to, but better.
I expect the price of, say, Microsoft to be fairly well priced on the market, but I have much less faith in the price accuracy of some nickel stock most people haven't heard of. Given the apparently huge number of prediction markets you'd like to exist... What creates sufficient economic value to drive accurate pricing for all of them? Particularly when, unlike stock markets, economic motives may not predominate for the most invested groups for a given question?
If there are many more investors them markets, maybe the markets are efficient (because there's no $20 just lying around then), but that doesn't sound like what you're describing. Your market-saturated world sounds like one with lots of pennies laying around. And I leave those where there are all the time.
> So it's illegal to run a "pump and dump" scheme in the stock market, but there's no such prohibition on doing it in a prediction market. Once real money starts going into these markets, you'll definitely see people doing things like buying up a bunch of shares in an outcome, creating fake hype to get people to believe that it's a real market trend, and then dumping their shares at an inflated price before reality sets in.
This already happens. One of the nastier moves I saw on PredictIt was to spike a particular market to deliberately trigger other participants' stop-loss orders, though that only works within a narrow range of sophistication.
Aren’t conditional markets set up such that Yglesias wouldn’t lose or gain money betting that O’Malley would win if nominated but he never gets nominated? That seems to alleviate that concern that Yglesias loses money on this, except for the opportunity cost. (It also seems like you can reduce opportunity cost here by using the same dollar to bet all the mutually exclusive conditional markets that condition on different outcomes of the same event. Is that already done?)
4.6.1.1 - This claim that hedging won't bias the markets seems way too rosy. There's not a bunch of people who all know the exact probability and one person using the market for hedging. There are a bunch of people all with different guesses as to the probability and different budgets/amounts of acceptable risks about how much they are willing to invest to correct errors. The (perhaps money weighted) average of these people is the "correct" value that the market should be trying to converge to. But if someone is investing a bunch of money as a hedge (rather than an honest prediction), this will tip the scales somewhat one direction or the other.
4.8: Perhaps the better argument here is that it is *much* easier to bet against a meme prediction market than against a meme stock, making it a lot easier for the market to correct itself.
Predictions markets that only evaluate if the chance is high enough (such as in the case of your comment policy) have some weird effects that I think could invalidate the results, and might not be fixable with the usual "free money" argument. If I wanted to make sure that a comment never reaches your attention, I can vote it down below the threshold for it to evaluate, and even though I am totally wrong on my "prediction", I'll never lose any money. There is still a chance at free money, but now the consequences to being wrong are removed (as long as you are rich enough to overwhelm the market). Perhaps this works better than I am thinking in practice, but especially for low traffic votes like this I think it would be easy to pull off.
On the opposite side, if I predict that you **won't** think that a comment was worth your time upon review, I have no incentive to vote negative below the threshold, since I won't get any of the money I am expecting to make. If I have sunk enough money in, it might even be worth my while to vote positive (against my prediction) in order to get it back above the threshold so that my bets get evaluated. I think this is less easily resolved than the first issue, and you should basically never see prediction far below the threshold because all that does is tie up your money while you wait for the market to close.
Prediction markets also monetise disinformation. Instead of looking for mispricing and then getting rich until the market corrects, you can spend money on a disinformation campaign to induce mispricing and get rich until it corrects.
This is not very different from pump-and-dump schemes in penny stocks, but providing a continuous, liquid, anonymous incentive to spread disinformation on *every* topic seems like it should be a concern. Not because the market won’t correct - because of the second order effects of increased information pollution everywhere else in our society.
In the optimal case this provides financial incentives for very robust anti-disinformation detection. However, solving loss of trust by drawing all of society and our information and decision-making platforms into a high-stakes HFT battle for truth might turn out to be like throwing water on an oil fire.
This assumes that the misinformation is coming through a channel that is otherwise considered very trustworthy, or else most people with money invested would probably ignore it or only adjust their bets a small amount.
Or, in the alternative, this means that people who are easily swayed by misinformation will lose money to people who are not swayed, which on net improves the prediction markets.
The benefit of making people put Skin in the Game is that they will necessarily become more discerning about which information sources they actually believe when trading.
I think I'm not understanding why 4.6.1.1 is free money. If I buy a share of Biden at 10 cents, I have a 50% chance of making a dollar, so my EV is greater, but I still have a 50% chance of losing money. Is the free money part:
(a) The EV on that trade being >0
(b) I can at some point sell that share to another trader for 50 cents
(c) I can take a strategy of buying shares for the less-protectionist candidate every 4 years and make money in the long term if hedging makes those candidates are consistently undervalued
(d) The import/export company is also hedging in other markets, so I can bet against them in every market and make an overall profit on those trades
(e) Various groups hedge various markets and I can take a strategy of betting against them in general and make an overall profit
(A). You might lose on an individual trade, but as the number of similar trades you make increases, you'll be more and more likely to gain on net. This might not be worth it for you, but it will be worth it for somebody.
I think the real issue with making a better prediction market is that it's such a niche product. Looking at the top eight most liquid predictions on polymarket they currently have a total liquidity of about $136,000. And there's only about 60 questions total. Let's be generous and roughly double that for $250k total liquidity on site. That's tiny. That's smaller than most minor league baseball games. Let's say there are five equally sized markets. That's still only about a million dollars. Let's round to a million (fair since one of them doesn't use money). Given a casino's 8% take (which would actually probably be lower since this isn't a casino) that's $80,000 in revenue. And that has to cover everything for the entire industry.
I can think of ways to build better versions. But if almost no one's going to use it then what's the point? At those rates I'm not even sure the revenues can cover regulatory costs. Regardless of whether it's a good idea I'd need to be convinced it could survive and hopefully even thrive.
Has anyone considered getting all that rationalist money behind a prediction market in an already high demand area like sports? That's a multibillion dollar industry with heavy existing demand and high growth. Yes, it's not as EA-sexy as stuff about politics or whatever. But fundamentally you'd be developing the same type of skillset and organization and technology. All that which you could eventually pivot into broader markets. Part of the point is such markets are useful for predictions in arbitrary fields. So why not arbitrarily choose the large, fast growing market?
But sportsbetting exchanges already exist. What value would a sportsbetting prediction market add? Come to think of it, Betfair does political bets as well, so I don't see what value political prediction markets would add either. 🤷
I can think of sports betting gambling houses (Fanduel, Draft Kings, etc). But not prediction market style exchanges. At least not in the US. More to the point, if this already exists then what's the point of it at all?
I'm surprised this article didn't look at the UK/Irish/etc. markets as live real-world examples of what a prediction market can do, since there's already fairly large-scale wagering on political and other real-world events. Granted, you've got bookmakers setting odds rather than purely market-driven pricing, but for liquid markets the difference shouldn't matter all that much.
To your point Betfair now owns Fanduel -- in theory the existing betting operators are best positioned to take advantage of eventual changes in the laws/regulations. Sports betting (increasingly legal in the US) is already fairly structurally similar to the sorts or questions that resolve in yes/no fashion on a prediction market.
I'm not sure I agree that you can't disrupt existing incumbents.
I very much agree that doing this more internationally would be a good idea. I proposed months ago that prediction markets, if they truly want to be accurate, need to start aggressively recruiting in other languages and outside of fairly narrow demographics. But that got a "nice idea but..." treatment. My first thought was literally "move to Macau or Ireland or something." But I don't think I could even get them to move from Berkeley to San Jose.
"Has anyone considered getting all that rationalist money behind a prediction market in an already high demand area like sports?"
The industry is salivating at this sentence. "Look, a whole new cohort of people who think that because they're smart they can beat us at our own game!" Or, for the stock market:
If you believe prediction markets are important you want resources to be allocated to develop them. The resources necessary to figure out how they work, build the technology, and lobby the politicians. If there's a big pot of resources in sports then it's better that you outcompete incumbents and use that to develop what you think is world-historically important. Especially because if you believe in the morality of prediction markets you probably believe in the morality of sports prediction markets. (Also, I would bet that a bunch of SF nerds can build a better DraftKings.)
That recommendation sounds like "has anyone considered getting EA behind a political campaign?" and as we saw, Carrick Flynn was the wrong candidate in the wrong area to back.
Take betting on this year's World Cup: France, the holders of the cup from the last competition, vs Argentina, and it looked like Argentina were going to win for most of the game. Then France equalised with two goals within two minutes. Played extra time, both teams scored. Went to penalties and the French made a dog's dinner of that so Argentina won.
Even good forecasters would still be uncertain as to who the winner would be, even at the point of knowing that both France and Argentina had made it to the final. Going on past performance would be little help, as both of them had won the cup twice before. Sports betting is tough, tougher than it looks, and getting into that market means you have to believe you can do better than the bookies. A lot of people have gone bust thinking they could do that.
The difference is that while I doubt EA has many successful politicians I'm 99% certain that EA has a lot of successful startup people and math nerds. It's actually in their area of expertise.
Many of these examples are political questions, which you would always expect the masses to be right about in aggregate, since the democratic process is about aggregating opinions. Some of them are less political. But what about a question like "will it rain tomorrow in New York?" To make a bet on this question, the only sensible strategy would be to check what weather modellers are saying and bet with them. But because this is the only winning strategy, would anyone actually make a bet here? I guess the thrust of my question is - shouldn't there be very little money to be made on problems that are genuinely hard?
I think the phrase "weather modellers" is doing a lot of the work here. If there's one universally acknowledged best weather modeller, then this reduces to the Nate Silver example in 2, and yes, everyone should agree.
If there are many modellers and nobody knows who's best, then this reduces to the competing experts example in 3.5, and a prediction market will aggregate them efficiently.
If you're an amateur weather modeller yourself, and think you're the best, then you should consider betting on your own opinion, as in 3.4, and making money if you're right.
Even in the Nate Silver case not everyone should agree. Supposing he is the best modeler doesn't mean that finding out what another modeler thinks shouldn't shift your probability. That's basically private information like knowing some Dem canidate for the house has a dark secret no one else knows about (should shift your probay slightly).
Also, let's assume Nate Silver is the best predictor and people follow him more or less blindly in prediction markets. Now he can (or could, with enough scale) make a lot of money by making a faked prediction and secretly betting against it.
Theoretically doable under some circumstances, but note Nate's argument for why he doesn't bother betting the model line in existing markets: the reputational returns on making the model as accurate as possible far outstrip what he personally could make by betting.
Currently, for certain, but that's because of lack of scale. Once enough money is involved, people (not everyone, but some) _will_ start to misbehave. Betting and gambling aren't exactly clean businesses.
No, that's not quite true. In the long run in an efficejy market your rate of return (over market average...0 here) can reflect the employment value of someone of your ability spending that much time doing research.
For instance, imagine a market in which people bet on a mathematical hypothesis. If you are a mathematician you can gain evidence about that claim by doing mathematics about it. And you should expect that if you have sufficient capital you can basically recover the value of the time you invested (if you can get more the other investors will hire their own mathematician if less then they won't).
Right, but in your example the market is not yet efficient until the second group hires a mathematician and then the returns approach zero. The first mathematician might be able to make enough money to recoup their time, the second just zeros out the two sides and nobody makes money.
1. There seems to be a confusion between "prediction markets will be accurate" and "prediction markets will be accurate after the fact."
2. The whole point of insider trading is that no one else knows about it. To argue that some insider is trading would be valuable information for prediction markets is both accurate and incoherent.
Did you mean to say "accurate and incoherent" or "INaccurate and incoherent", because the former sounds strange as a combination
1. What do you mean?
2. I don't think anyone would know insiders were trading on their market specifically, but there would be a general knowledge that insiders often/rarely trade or that there were weak/strong regulations against it.
I'll try to get back to 1 when I have time; it's more subtle than I have focus for right now. For now, the best I can say is that the accuracy of a prediction market prediction is actually veridically proven only when the underlying event occurs, not when people bet one way or the other.
2. "In fact, knowing that President Biden is insider-trading on a “Will President Biden resign?” prediction market should only increase your confidence in it getting the right answer!" That looks an awful lot like a claim that someone would know that an insider was trading.
With #2 it looks more like "if an insider trades on a prediction market, this makes the prediction market more likely to be accurate, whether or not you know about it (since the insider knows the true result and is incentivised to move the market toward it); however, this means that if you *do* know about a particular insider trading on a particular prediction market, your *assessment* of that specific market's accuracy should increase relative to your prior".
>For now, the best I can say is that the accuracy of a prediction market prediction is actually veridically proven only when the underlying event occurs, not when people bet one way or the other.<
Sure, but — so what?
That is, for a given definition of "proven", you can make an argument like this against almost any sort of attempt at knowledge:
• "A study is only proven accurate when a meta-study confirms it." • "An ETA is only proven accurate when the item actually arrives." • "A poll is only proven accurate when the election turns out the way it had indicated." • Etc., etc.
But: that doesn't mean these are not useful tools, nor that they are not / cannot be accurate! (That is, "useful/accurate *relative to available alternatives*"; e.g., simple guessing or auspicy.)
Indeed, what's left, if we apply such a standard universally? Would one argue against the utility of, say, UPS producing an "Estimated Delivery" date for customers — data-driven, sure, but of *unproven* accuracy up 'till the event itself occurs?
Yes. Yes, one would, because UPS "Estimated Delivery" dates are complete garbage and those morons could fuck up a wet dream.
...But still, if I'd chosen a better example, you'd see what I mean, right?
What claim beyond "this is more accurate than most other ways to make predictions and can be useful even if not infallible" do you see us as making?
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One can obtain a good sense of how accurate the market's conclusion is likely to be, if there is some worry about this:
★ Look at how many 70c "shares" turned out to occur. If roughly 70% of them did...
★ Do the same for other questions and prices until satisfied of accuracy. This has been empirically demonstrated elsewhere to *my* satisfaction already, of course; but if it turns out that *you* discover otherwise...
★ Well, then: If so — if you find the markets to be consistently inaccurate — you can make money!
★ ...and if you can make money, so can others. And if everyone is buying in such a way, we have price pressure in the direction of the more accurate prediction/price.
★ Hence, we—... Okay, okay, you've got it from here, I'm pretty sure!
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>That looks an awful lot like a claim that someone would know that an insider was trading.<
I don't think so. User magic9mushroom, above, explains it excellently and in the same way I understood the entry; but since I (vainly) feel compelled to add a separate attempt here anyway:
The point being made works whether or not one can determine if insider trading is occurring, so a yea or nay there is not really important to Scott's argument: if you can, cool, you know it's more accurate than usual; if you can't, cool, there's no reason to worry, because see previous clause.
In other words, whatever your contention re: how knowable insider trading would be, Scott can shrug and say "okay, sure" without affecting the main thrust of the section, which is only really about the effect on pricing.
"The whole point of insider trading is that no one else knows about it. "
The point is that the public doesn't know about some relevant information the insider trader knows.
An insider trade always reveals information, because their trades shift the market towards whatever the insider knows will happen.
The only question is whether the gain in information is worth the loss from non-insider traders quitting in disgust because they keep ending up on the wrong end of an insider trade.
#1 would seem to indicate that we need a prediction market about prediction markets. I'm only 10% kidding here.
No, the point of insider trading is to use information not available to the general public. It is the illegality of using insider trading in stock market for example, that leads to it being hidden from others.
I don't know about 'canonical', they're subject to manipulation too. I think they're useful as an additional source of information where people involved have real 'skin in the game'.
"Canonical", here, means that sufficiently-liquid prediction markets can't stably disagree with each other due to the arbitrage issue. They can be wrong, but all of them will be equally wrong, so there's a "canonical" prediction market answer.
(That is, if you manipulate one prediction market with loadsamoney, you'll indirectly move all prediction markets about that issue, because people will arbitrage the manipulated market with others and so you'll wind up soaking all of those others as well.)
>Sufficiently liquid
I wonder how one would go about determining this. Scott's manipulation attempt was about very low-stakes scenario about random Manifold person getting charged with a felony. Maybe manipulating that information is genuinely worth only of some 200 USD, for Scott. However, value of manipulated information about a high stakes political outcomes could be plausibly worth billions. (Say, war in Ukraine: think of price of high tech weapons, value of assets under stake, and then of course, the cost of all involved human life.)
Alternatively, if there exists some other market (say, an insider trade of Ukrainian chocolate factories or high-tech weapons stock futures) where the information is more valuable than the currently available prediction markets, a person with the valuable information would be advised to trade on the other market.
My point is that if one can actually trade on these markets (i.e. you aren't just hacking the market to say the price is X but not letting people take the other side, you're actually trading it at X), then manipulating, say, the Polymarket "will China invade Taiwan in 2023" question with billions of dollars would manipulate all "will China invade Taiwan in 2023" questions in other prediction markets (e.g. Kalshi) by proxy as people repeatedly arbitrage away the difference and you pour more money in to maintain the peg on your directly-affected market; all the prediction markets still give the same answer, it's just a wrong answer.
(In the specific case of China/Taiwan there are semi-plausible perverse incentive issues related to the uselessness of money if you die in a nuclear fireball. But my guess is that there'd be enough time for the market to resolve and you to spend the money before ICBMs start getting thrown, so it's not as fully perverse as "will there be a nuclear war" (which won't resolve YES until too late). In any case, you get the idea.)
Not disagreeing. My comment was less a direct reply and more a tangential pondering about what happens when the prediction markets are small or illiquid compared to value of prediction.
A limited nuclear war might not kill *everyone*, and someone far away from major targets might be able to profit from starting one and survive to enjoy their winnings. There are also numerous people who might enjoy seeing urban centers destroyed for ideological reasons.
Are you talking about insider trading, rather than the "prediction market stably doesn't give the right answer" issue I was referring to (along with manipulation)?
One point regarding the "will there be a nuclear war" market is that generally, like most businesses, prediction markets are headquartered in major cities; if the prediction market's records are destroyed before the market's declared resolved, you don't get paid (and if your bank's destroyed before you can physically cash out or pay for the stuff you want, again, it's useless). And, indeed, "a place away from a city" and "emergency supplies" are the things I was implicitly referring to when I said there'd probably be enough time to spend the money for a "will China invade Taiwan" market.
It's fairly hard to start a nuclear war deliberately, and there'd be a significant risk of hyperinflation and/or asset seizure in a bunch of jurisdictions on top of the "do you even get the cash and/or survive to spend it" problem, so I think the "every prediction market is also an action market"/insider-trading issue is relatively minor - the financial incentives don't work very well, and a prediction market only actually helps achieve something you want for ideological reasons insofar as it lets you give *other* people financial incentives.
I'm pretty sure I lifted the hierarchical court system, where each court is theoretically a prediction market about what the next higher-up court will say, up until you reach the Court of Final Settlement (Supreme Court), from somebody else. Possibly even Robin Hanson.
I think it was me - https://twitter.com/ESYudkowsky/status/1455222042186305541 . And now I'm completing the cycle by laundering it back from you, because it feels awkward to claim to have invented something in my own post about it.
How about refining it with prioritization by transaction volume rather than selecting randomly? Or perhaps alternating, ruling on a case with the most at stake on odd-numbered days, then on even numbered days resolving whichever is currently trading closest to 50/50. Goal being to focus the court's scarce attention on matters of consequence and uncertainty, thus providing the least noise and most value per unit of judicial signal... and incidentally make market manipulation even more self-limiting than normal, since the harder someone tries to buy an unjust verdict the higher that case would drift toward official attention.
I thought I first came across the concept in a post on Scott's blog back in the LiveJournal days.
I have a strong intuition that "people who have money to spend on prediction markets" and even more "who also have an interest or knowledge of prediction markets" is an incredibly biased sample of people.
I'm just very pessimistic on the ideal vs the practice. The same kinds of negatives I consider for the stock market. Or markets in general. Prediction markets depend very strongly on right wing economics being accurate imo.
In a sense that's optimistic, because you'll be able to make a lot of money if you can figure out what their biases are.
There are some cases where the equilibrium answer for a prediction market with perfect information is not the same as the true probability of the underlying event.
"The US undergoes 1,000,000,000x inflation by 2030", denominated in USD, is one of the obvious examples; if you assume for the sake of argument that this is a 1% chance and that everyone knows this, the equilibrium price for a contract that pays out USD$1 on YES is far less than 1 cent (because if YES is true, USD now is worth at least a billion times USD when the contract pays out, while this is not the case if NO is true).
Similarly, the price of "will the world end" is $0 on a standard prediction market because a resolution as YES prevents you from collecting. The same is true of "will the records of this prediction market get lost", which means a lot of extremely-disruptive things (e.g. nuclear war) don't show up in prediction markets.
This issue is discussed in the post.
Check the Wayback Machine; that section was added after almost a day. Substack doesn't give me exact timestamps, so I can't say for certain that it was after I said that, but it's pretty likely.
Also, I wasn't responding to the post directly, but to a comment making the argument that mispricings are necessarily exploitable.
Only if you have a bunch of spare cash floating around.
Don't need cash for a prediction log - demonstrate the bias is large, and the funding will come.
Yes do better than market for years with tons of time investment before you see a dime. Starving artist version of prediction market user, meh.
That sounds like an inability to demonstrate the bias is large. So, problem solved.
No because you'd need to build up a record significant enough to not be luck.
The absolute gains will be smaller if you don't have much money but the relative gains should be the same. If you can double your money every six months, that should hold true whether you bet $10,000 or $100.
Actually, your rate of returns should go down the more money you put into prediction markets since you'll move the price.
Gain relative to time invested gets worse if you don't have seed money.
> how likely to the claim is to be true.
Typo, that first "to" shouldn't be there.
My main question whenever I read about prediction markets is: why are they necessary? The best answer I can surmise from *light* googling is that it can serve as the most accurate representation of the wisdom of the crowd. Is that a good one-sentence answer to the question: "Why prediction markets?"
I agree, specially if you believe ppl putting down money on something is a very good indicator of what they actually believe at that point.
Interesting... so sort of like a way to cut through any propaganda or BS.
Example: Mainstream media/ideology is that X won't work, but everyone betting in the prediction market says X will work, since that's a more realistic indicator of the assumed body, it's more likely X will work?
Sort of. People have different biases, and when you take a large number of people without selecting for any bias relevant to the prediction market, then you get a lot of biases cancelling each other out.
It is similar to how if you ask individuals to estimate the number of marbles in a glass jar, they display wild variance, but if you average the estimates of individuals, the aggregate usually performs better than most individuals.
Except when people are putting down money because they want to make more money, and not because they hold a strong belief towards a particular prediction
Think of it as a way of paying Superforecasters and experts.
Accurate and trusted, establishing common knowledge in the long run.
If someone doesn't trust it, they can make money. If they just claim they don't trust it, they won't be believed unless they put their money where their mouth is, and people become instantly less tribal and stupid when their money is on the line.
>As a test, I tried to manipulate the market on whether Austin Chen, founder of Manifold Markets, would be charged with a felony.
If I recall correctly, you did this with his explicit permission? It would be worth having that fact displayed next to that sentence if so, since otherwise this reads as a minor alarm bell.
I just wanted to pay a compliment. This is so beautifully written. A complex concept, simplified perfectly, without it being dumbed down.
Thanks - and thanks to the many subscribers who gave comments on the rough draft which I tried to take into account.
Thanks for writing this! If only we could tag Rostin Behnam :P
In addition to betting on Manifold, ordinary folks in the US and abroad should also participate in the markets on Kalshi, Polymarket, Insight Prediction and PredictIt. Real money is the ultimate play money, as a reputation system that most freely transcends the prediction platform. You don't need to be a hotshot prediction expert - skin in the game allows you to learn quickly about your interest.
To promote prediction markets from a regulatory standpoint, the CFTC cares about the economic purpose of these prediction markets, namely their use to hedge risk and serve as a price-basing mechanism. Directly using these markets for information or to hedge risks and demonstrating a positive economic effect to your life and business is a central legal argument to getting these markets approved!
I had a concern with prediction markets that I think answered myself. Still posting it here for edification and potential correction if my answer was wrong.
> One concern I've had with prediction markets that this post doesn't address: is it good to expand the set of things that companies can hedge against?
> Let's say that I'm Satya Nadella and I'm worried that a startup might disrupt and take over Microsoft Office. Today, I can action that worry by investing into Microsoft Office, investment that presumably makes Microsoft Office better, increases the productivity of its users, and therefore raises the GDP of the human race.
> Let's say we live in Scott-topia and that I'm Satya Nadella and I'm worried that a startup might disrupt and take over Microsoft Office. I might decide that instead of investing in Microsoft Office and reducing the dividends paid to the shareholders that employ me, I'll buy a large stake in "yes" for the prediction market "[w]ill Microsoft Office make at least x bajillion dollars in fiscal year 20XX?" so I'll be set no matter what.
> To phrase my objection more cogently: what propels our society forward are the holes in the efficient market hypothesis; the innovations that are not priced into asset prices. Will large companies ability to hedge against those reduce the incentive to create and fund those innovations?
I think the answer to this objection is that the startups/VCs will take the opposite end of the trade with Microsoft and it'll end up being a massive waste of time for everyone involved (since they could just invest the money in their products) so they won't do it.
> I might decide that instead of investing in Microsoft Office and reducing the dividends paid to the shareholders that employ me, I'll buy a large stake in "yes" for the prediction market "[w]ill Microsoft Office make at least x bajillion dollars in fiscal year 20XX?" so I'll be set no matter what.
Do you mean "buy a large stake in 'no'"? If they bet on the prediction market that their main business will go well that's the opposite of hedging.
Hedging like that seems pretty dangerous though- if you drive up the price for "Microsoft Office gets disrupted" in the prediction market, that seems likely to hurt you in the regular stock market.
It is unlikely that the size of the market for Office to make X bajillion will ever be comparable to X bajillion and not 1000 smaller. Also, if market participants were aware that this market could be used by Satya for this purpose, they would quote pretty lousy odds for any size.
In general, market liquidity exists in size only if either 1)there are large participants naturally on either side of the market, like oil futures market is big because oil producers are naturally long and oil consumers are naturally short 2) the market can be hedged to a decent degree with an already liquid instrument.
People can already short Microsoft as a whole. Enabling them to, in essence, short Microsoft Office doesn't seem like it'd make that much of a difference?
There is a large market in MSFT shares and derivatives on them. There are many natural buyers and sellers on this market, e.g. investors who want to hold more or less of MSFT. If Office is a relatively small part of Microsoft business, shorting Office requires an entirely separate market , one that cannot be hedged well in existing markets. I do not see many natural buyers or sellers for this market, so I do not think this market could grow to a scale comparable to market in MSFT shares.
This isn't central to your argument, but:
"Finally, I envision that someday people who want to know the answer to specific questions can subsidize prediction markets on them. For example, the Democratic Party might subsidize a market about which Democratic primary candidate is most likely to win the general election."
-- how would this market resolve? Only one person is going to get a chance to win the general election.
Conditional market - see 5.1. Thanks for noting how confusing that is - I've edited a reference into that sentence now.
Interesting. I followed the link in 5.1, and got to the part which uses your own unbanning decisions as an example, because the world is a loop. Anyway, the example there suggests that in the Democratic example you would avoid a bunch of failures/distortions by not announcing in advance that the outcome of the set-of-conditional-markets will influence the selection of the candidates, which is a slightly disturbing situation because the whole system generally relies on everything being transparent.
I'm not crazy about the first sentence "Prediction markets are like stock markets, but for beliefs about future events." There are two crucial differences: most prediction markets have binary outcomes and they resolve at some point. This is not the case for the stock market. While most Americans are not familiar with binary options, I don't think using the stock market as an analogy is accurate enough. I'd just compare it to sports betting, even though if it may come with a slightly negative connotation.
Also, a slightly substandard stock market investment will likely still make you money in the long run, while a slightly substandard prediction market "investment" will lose you money. This is the difference between investment and speculation, and non-experts should always avoid speculation.
This whole FAQ seems to *at the same time* claim that prediction markets make the best predictions possible, *and* that there's money to be made by beating the current state of the prediction market. I can't see how these views are compatible.
One thing that annoys me about this article is the recurring thing about "if I'm wrong you can get rich quick", which I realize is sort of "a bit", but also feels like a taunt. "Well, if you're right, you could make money so stop arguing." No, if Scott [et al] is wrong, he's wrong, and whether I make money from it has nothing to do with it. (Also, it's going to be "place positive-expected-value bets that resolve over maybe years", not "get rick quick", but like I say, I know it's a bit.) I distinguish this, emotionally, from "if the market is wrong people will bid it towards correctness", which is intrinsically part of the argument.)
> This whole FAQ seems to at the same time claim that prediction markets make the best predictions possible, and that there's money to be made by beating the current state of the prediction market. I can't see how these views are compatible.
They become compatible when beating the current state of the prediction market is impossible, because the consensus is accurate. You're correct that these are diametric forces governing the market dynamics - the equilibrium determines the size of the market. Present status quo, markets seem to get it right within a few percentage points and the people who consistently make money there aren't making more than a typical software engineer.
Overall, coarse grained efficiency is compatible with fine grained mispricing -- indeed, it is betting on mispricings,and therefore erasing them, that keeps markets efficient.
Conversely, stock markets ARE for beliefs about future events (specifically, future stock prices), so the "but" doesn't make sense here. The differences, instead, are those Lech lists.
Not exclusively - there's also the dividends, and while to an extent this is a belief about the future as well (the company will actually pay dividends), this is at good odds. As is "we can expect the economy to grow".
This is why stocks are (typically) investments, while prediction markets (as well as gold and futures) is mostly about speculation (although futures have other uses, like in controlling risk).
You could frame it as: the stock market is like a prediction market, where people are trying to estimate the price of a share of a company.
The resolution in a prediction market is binary but "price of a share of a company" is not resolvable in a static fashion, because the company itself changes. At one point in time, a company might have been undervalued, and it'd have made sense to buy more stocks of that company. 10 years later, the board has changed, the leadership has swapped companies, and they're dealing with new competition. Now the problem of estimating the price of a share has a resolution again, but one different to the resolution 10 years ago. So, in stock markets, we do have resolutions, just dynamic.
Couple things...
- Much of this just seems like "efficient markets hypothesis" repeated in different ways. Is that not right? Is there a reason to think it'll be more accurate than the stock market's predictions? The only one I saw is the point about how prediction markets can't have a ponzi scheme go on forever, but that applies to certain stocks as well, and doesn't seem like a super broad objection in any event.
And the thing is that (1) I don't think most people would call the stock market "accurate" or "unbiased" except perhaps in a hypertechnical sense, and (2) the stock market needs a lot of TLC to make sure it works properly. There's insider trading, but that's hardly the only example. In fact, to go back to the crypto thing, part of the objection and the reason (allegedly) that it seems like such a shitshow is that they DON'T have the regulations the stock market has.
More generally I bet a bunch of economist PhDs have written a lot of useful shit about the efficient markets hypothesis, that this could probably benefit from some engagement with, if I'm right about this being similar.
- Is the idea that prediction transactions will be public? There's all this stuff about how you can follow Nate Silver's lead, but does Nate Silver have to reveal who his bets? What if he's just quietly sitting there, anonymously betting, not making enough money to have anyone notice?
- I think "in the long run" is perhaps a larger qualifier than people are assuming. To take presidential elections again, they are every 4 years, and the political landscape changes over time such that there's never all that big a sample size of analogous presidential elections to the current one. If Nate Silver is the best predictor (to go with the analogy, not saying it's true), maybe his biases simply match the current landscape and it'll be different in 8 years, or maybe given the small sample size (4 elections?) and the inherent uncertainty of judging percent predictions for binary outcomes it's simply hard to say who is best.
- As a test, I propose something other than big picture geopolitical developments that people normally associate with prediction markets. Sports! Much higher sample size (2430 regular season baseball games per year, and that's just one sport, and the outcome is numerical and unambiguous!), and there's already a lot of predictions out there you can compare to. Compare the sports prediction market to Vegas money lines/odds, pundit predictions, etc.
Prediction markets AFAICT have (in theory) an advantage over Vegas odds, which is that the house edge probably negates the positive EV from certain arbitrage strategies, which probably makes them less efficient in theory.
- Regarding the "zero sum" point, can't you take the money from the primary (i.e. not secondary) purchasers of prediction "shares" (or whatever you call them) and invest them in US government bonds, and the interest is paid out proportionally to the winners?
In the absence of Likes, I just wanted to say that this is a great comment.
Sports betting market _are_ prediction markets, in that sports books respond to misprices (as revealed by imbalanced betting) by changing their odds -- either the actual point spread, in those cases, or the price to buy one side or the other. You're right about the house edge making it harder to exploit mispricing, though. Hell, in horse racing, the house edge is 17% on win/place show betting! More typical sports betting is about 5%.
"... suppose that an import-export business spends millions of dollars betting that Trump will lose in order to hedge against his protectionist policies ..."
Wouldn't that business want to bet he would *win*, not lose? (That is, if the policies of Trump's main competitor would be more beneficial, on balance, for that import-export business.)
If Trump wins, the business would presumably lose some revenues and profits due to his policies. But winnings from their prediction markets bets on his election victory could at least partly offset that.
(If I'm confused and have misunderstood this, welcoming corrections!)
You're right, thanks, this is why I mostly invest in index funds.
Investing wide, like an index fund, or for non-Americans a global index fund, does have the added advantage (on top of being cheap) of removing yourself as far as possible from the risk of market manipulation and insider trading. You make yourself harder to exploit.
I think that, in the ideal case, prediction markets will work as you say, and that would be a good thing. Likewise, in the ideal case, cryptocurrency would also usher in an era of decentralized prosperity, and that would be a good thing too. But in practice, as soon as large sums of money (even virtual money) is in play, the entire utopian landscape shatters into a hodgepodge of Ponzi schemes and general fraud. This is the case with cryptocurrency; this was the case with the stock market; and this will be the case with prediction markets if they ever gain enough popularity to be useful.
In the case of the stock market, the problem was somewhat improved by regulation. There are still scams and clever get-rich-quick schemes, only now they have to be a lot more clever, and perhaps valuable enough to buy off a regulator or two. The stock market sort of works, but it would be foolish to claim that the value of every stock accurately reflects the true value of the company it represents.
Sadly, I don't think prediction markets will ever get even to that level of accuracy, because the incentives are much more entangled. Arguably, a share of "Joe Biden will win the election" is, indirectly, a lever that someone can pull to influence the election; thus, regulators with their thumb on the scale would wield considerable power. Selling the election on the conventional stock market is much more difficult (if not outright impossible).
Is it that much more difficult? You can buy or sell a package of stocks based on things that the candidate/candidate's party has said they'll do if they win the election. Coal mining companies' stock goes up if Republicans win, down if Democrats win. Same for renewable energy companies, anything that one party has talked about putting tariffs on, health insurance companies (stock goes way down if single-payer is instituted, up if individual mandate is enforced, etc.), etc.
This is incredibly and informative and well written. However, to the extent that I find prediction markets objectionable, it has very little to do with their predictive power, and more to do with the aesthetics of how the analysis is presented. I frequently, both here and in other rationalist spaces, see potential human disasters referenced in terms of prediction market odds. Whether it be numbers of future Covid deaths, mass shootings or the likelihood of Putin launching a nuclear weapon, someone is bound to bring it up in the context of prediction market odds, and those odds, definitionally, are defined by people who are framing the possibility of vast human suffering preliminarily in the context of whether they can make any money out of it.
I understand that the predictive power of the markets still have value in these cases, but even so, there's an "ick" factor I can't get past. It feels like reducing potentially devastating events to data analysis/investment opportunities without acknowledging the human toll plays into the worst stereotypes about the rationalist community.
I don't think this is weirder than eg citing a paper written by an academic who hoped to get promoted for it, or calculating the odds on a computer that someone at Microsoft or IBM got rich for inventing, or reading about them in the New York Times knowing that your subscription money is going to the Sulzberger family. You just accept that people have incentives and you trust them if the incentives are aligned with getting the right answer.
To be honest this seems horrifically misguided to me. The purpose of prediction markets is to get information about the likely hood of these events. In the case of disasters having more such information is essential to mitigate or prevent them. The fact that you could, in theory, make money by participating seems to me to be entirely unimportant by comparison.
Opposing innovations that will help save lives for purely aesthetic reasons plays into to the worst stereotypes about people who are ignorantly anti-rationalist.
I get it, and I should clarify that I'm more put off by the general discourse around prediction markets than the markets themselves. This is one of those things I would not have even bothered commenting on if I'd seen anyone else echo the same sentiment beforehand - it just feels like *somebody* should bring it up.
As to your last point, I guess I do feel like the rationalist community has issues with how it is perceived by the broader population, and, in general, somewhere between a reluctance to, and a principled stance against, modifying its behavior to address this perception. Which I get, but I also think that perceptions *do* matter, especially if we want to convince other people to join our community who may otherwise be put off.
I think pushing this point any further would risk some maybe legitimate accusations of "concern trolling", so I'll let it go at that.
I'm quite torn on this. I do think that perceptions matter and that there is value to trying to improve other's perceptions of this community. On the other hand, most criticisms against rationalism/EA/prediction markets/whatever are so *completely* illogical, that it seems mostly out of our hands.
For example, in the wake of the SBF implosion, Effective Altruism got a lot of bizarre and irrational criticism. I heard many people say things like "I agree with the ideas of Effective Altruism, but find it troubling that the first step is to get rich". Apparently none of the people saying that thought to check if the first step of Effective Altruism was actually to get rich. To the best of my knowledge this is not a view that is espoused by any Effective Altruism organization or public figure, not that it matters to them. Arguing against people making these sorts of strawman arguments is completely counterproductive, and that probably accounts for a lot of the reluctance to address perceptions.
Given this environment, it is hard to see how to actual make progress on the PR front. If you had specific ideas about how to solve these problems I suspect that they would be very positively received, but I'm not convinced its really possible.
I also think that suggesting people are excited about prediction markets because it would enable them to get profit off of tragedy is inaccurate and therefore more similar to the EA criticism example above than actual actionable advice about improving our perception, although I suppose I could be wrong.
You draw comparisons between prediction markets and stock markets, but I’m curious if you think sports betting is another useful analogy. The global market for betting on, say, the World Cup outcome is probably orders of magnitude larger than any of the relatively niche prediction markets you highlight. Based on these answers, I would expect one of four things to be true:
-The betting market is an accurate, unbiased representation of which team is likely to win.
-The betting market has a consistent, material bias, so Goldman Sachs hires quants who are experts at soccer to take smarter bets, make tons of money, and correct the market.
-The betting market has a consistent bias, but Goldman Sachs isn’t exploiting it, so there’s a ton of money on the table that someone could pick up tomorrow (or at least in 2026)
-The betting market has a consistent bias, but it’s not viable or worth it for anyone to correct it (like the prediction markets you mentioned today)
As far as I know, option #2 isn’t happening. I could be wrong, but I’ve never read outrage bait stories about how Wall Street won big by betting against America or something. And if this is just because of regulations, I’d still expect someone to try it by setting up shop in the Bahamas.
If option #1 is the case, do we see the benefits you predict? I’m not well versed in the world of sports, so this is an honest question. Do team owners look at Draftkings picks to decide which players they should keep? Do coaches see terrible odds against their team and decide to change strategies before they even play? If so, this seems like a strong argument in favor of prediction markets, and one you might want to highlight in another revision. But if not, I’m curious why you think these markets aren’t living up to their potential, and whether you think this is a counterpoint to your optimistic take on what markets can do.
If option #3 is the case, why aren’t you making tons of money on Draftkings? And if it’s option #4, then what problems do you think are holding back sports betting markets, and why don’t you think other prediction markets will suffer the same fate?
(I suppose option #5 is that this is a flawed analogy, or that I’m missing another obvious takeaway.)
I agree these are good questions. I don't know anything about sports betting so I can't answer them. Zvi might know more.
I think option #1 is correct.
It's also just not very usuable information for team managers. E.g. if I'm a coach and I see that we're 30% underdogs vs the 70% favourites, I could change my strategy... but then again, there's no reason to expect that a different strategy would change those numbers in a favourable way, and I picked the current strategy because I thought it was the best one.
I wonder if it would be legal to have conditional sports betting, eg "What are the odds that the Sharks win the game if they use Johnson as their starter?", "What are the odds that the Sharks win the game if they use Smith as their starter?", etc.
I think it'd depend on the state. But I'd guess there's no particular reason that would be different from betting on a general game outcome. Though I'm not aware of anyone who actually does this. But I don't see how it's materially different from (as does actually happen) betting on things like how many points will be scored by specific players.
The bigger issue is what happens to the betters when the scenario doesn't occur.
Conditional sports betting is a thing, e.g. https://www.onlinebetting.org.uk/betting-guides/bet-types/conditional-betting.html. You can do things like “$50 on Argentina to win, as long as Messi starts”.
But you can have all sorts of conditions so you don’t get the highly visible big volume markets that you get with simple “Who will win?” questions.
In baseball betting, this is actually the default case. Most baseball odds I see are conditional on the listed pitcher actually being the one who starts, and the bet is refunded if they don't (due to late-announced injury, usually.) You can also (sometimes?) bet on "regardless of who starts", but the pitcher is such a large part of baseball success that I don't why you'd bet that unless you had inside info or something.
This has the same problem with causal direction as a lot of conditional markets: if the Sharks' opponent knows that the Sharks will start Johnson or Smith depending on the outcome of the prediction market, the Sharks' opponent will change their strategy accordingly. To give an extreme example for clarity: imagine a predictions market on whether you'll win a rock-paper-scissors match conditional on having played rock, paper, or scissors, which your opponent can see operating and participate in.
I'd disagree, the inputs *into* the 30-70 figure are highly usable pieces of information for coaches and upper management.
Like the models gambling houses/analytic syndicates use to predict performance are basically exactly the same as what sophisticated teams are aiming to do in house. At least in football, and I assume NBA is the same. Knowing that X team performs better when Y player is playing rather than Z is valuable for both gamblers, bookies, and coaches for example.
There are quants who consistently make money at sports betting. But there's not a ton of money in it and the kind of people who can do it usually have more lucrative option. In part because banning it has made the market relatively small. In more sophisticated markets, mostly those where gambling is unambiguously legal, the best quants are employed by the gambling houses to prevent such edges from occurring. (Or rather, to provide the house itself with the edge.) The house can usually outbid independent actors in the long run.
As to why sports teams don't pay much attention: most leagues make any involvement with gambling extremely against league rules. Most prefer not to risk their careers by even being around the gambling houses. After all, they're making a lot of money just being players/coaches/etc. Why risk an ethics investigation?
In short, they're not really comparable unless prediction markets really are acting as casinos with the house offering specific odds generated by internal quants. Sports betting and casinos have an entire third actor, the house, that is absent from the stock market and should be absent from a good prediction market. Additionally, executives in business are allowed to hold stock (modulo insider trading rules) meaning they're under a less strict regime than sports managers. In part because stock ownership aligns incentives while allowing a team's manager to place bets can only unalign incentives.
"As to why sports teams don't pay much attention: most leagues make any involvement with gambling extremely against league rules."
True, but boy is this heading for a crackup and major scandal as all the leagues form explicit partnerships with betting outfits.
Shh. It's different when the men in suits do it. (But yeah, agreed.)
Unlike a true prediction market, which is zero-sum, sports betting is pretty much always negative sum, that is, you can't make a bet and its inverse for some outcome and come out even. Bookmakers offer worse odds than would be "fair", and would probably ban anyone who for some reason is still able to win big consistently, so this is basically pure gambling.
Sports betting in the UK is negative sum, as @Xpym pointed out
Places like Betfair Exchange don't make money by overpricing flat bets like a tradiitonal bookmaker e.g. quoting 7/1 (12.5%)when true odds are 6/1 or something, but instead by charging a 5% cut on the profits made by people betting on the market.
Often due to low volume some individual markets fall into 4, cat 2 definitely used to happen more but now happens much less as the smart money came in, and cat 1 is now the default.
In fact, two of the smaller Premier League teams most associated with the belated (vs US sports) analytics wave in football, Brighton and Brentford, are owned by men who made their fortunes gambling professionally. The skill set needed is basically identical, predicting future performance in order to either maximise it or maximise earnings on gambling.
Their edge (alpha I suppose) is now smaller than it used to be, but they can punch above their weight due to better recruitment, set pieces, and finding arbitrage opportunities on the player transfer market by shopping from smaller countries.
I said something similar in my top level comment, but I think it's option 4, and the reason it's not viable or worth it is that the betting generally happens in places where there is a house edge.
So lots of arbitrage opportunities are better than "the market" but still not good enough to be positive EV.
(not that I'm necessarily bullish on prediction markets in general or the idea that teams can use them as a source of info)
I believe #4. Sports market predictions a) aren't unbiased (the people betting very often don't just try to maximize their gains, bit instead bet on "their" team in order to increase the excitement of watching the match), and b) are wide-open to corruption by rigging matches.
Re #2, see https://sig.com/Sports-Analytics/
EDIT: My comment below is about the Forex market rather than sports betting, so it doesn't speak to your point. Leaving for posterity/accountability.
---
When Liz Truss announced her rather 'brave' UK budget earlier this year, hedge funds bet substantially against the UK by shorting GBP, including those based in the UK.
I can't immediately find outrage bait, but anecdotally I remember there being a decent amount of it (though significantly more reserved for the government).
https://www.thenational.scot/news/22638822.liz-truss-backers-city-made-small-fortunes-shorting-pound-report-claims/
There are some cases where a combination of #2 and #3 is correct, like: https://www.bloomberg.com/news/features/2018-05-03/the-gambler-who-cracked-the-horse-racing-code
I want to preface this by saying I like prediction markets and think they are a net good. But I think there are some clear problems with them that you've missed or hand-waved away in a fashion I don't find convincing.
For example: "4.2: Would prediction markets encourage harmful or illegal activities? ...I think the strongest evidence against is that this basically never happens in stock markets."
I think this is an awfully rosy image of stock markets. Because of many traumas over many decades we've built up complex systems of financial regulation that make stock markets less prone to exploitative harmful schemes than e.g. crypto is - but the natural state of a financial marketplace is to be scam-infested.
So it's illegal to run a "pump and dump" scheme in the stock market, but there's no such prohibition on doing it in a prediction market. Once real money starts going into these markets, you'll definitely see people doing things like buying up a bunch of shares in an outcome, creating fake hype to get people to believe that it's a real market trend, and then dumping their shares at an inflated price before reality sets in.
And of course there's any number of other market manipulation tactics that are known. You can set up a government agency to police these, and it might even work some of the time, but do bear in mind that the Securities and Exchanges Commission has a $2.5 billion annual budget. It's not enough to say "pump and dumps are banned", you need to have people with the job of prosecuting them, and that cost is not negligible. It might be worth it! But it's not negligible.
I also think that in "4.8: “Meme stocks” like Gamestop and AMC sometimes remain mispriced indefinitely. How do we know this won’t happen with prediction markets?" you don't adequately account for the "Market can stay irrational longer than you can stay solvent" effect on markets with resolution dates long in the future, or conditional resolutions that are likely to not be met. You mention these sorts of concerns elsewhere in the FAQ, but don't apply them to the failure mode where they are relevant!
Personally, I think it's absurd that Tesla is valued higher than all other automakers combined. But I don't short Tesla because I don't have any way to prick the bubble and force the stock price to reflect Tesla's real value as a company. There's no moment of truth - I could think the market is deluded, be correct that the market is deluded, and lose all my money betting on the correct value because it takes too long for the market to realise I'm right.
Now, betting on an election outcome in a couple of months doesn't have that problem - we know that the tide is going to go out and we'll get to see who's been swimming naked. But betting on, say, which candidate is more likely to win if nominated DOES have that problem.
Suppose the market is convinced that Clinton will be a stronger nominee than O'Malley. I'm Matt Yglesias, I'm sure that O'Malley would win, and I also happen to be right. But O'Malley never gets close to the nomination, and my correct belief never has the opportunity to be proven true. The market stays mispriced until it expires. My correct bet lost me money, and the market never accurately reflected the reality that O'Malley Would Have Won.
Now, these are sort of edge-case scenarios and I do agree that prediction markets are very good in modal cases. But I also think the edge-case problems are real.
You said basically everything I wanted to, but better.
I expect the price of, say, Microsoft to be fairly well priced on the market, but I have much less faith in the price accuracy of some nickel stock most people haven't heard of. Given the apparently huge number of prediction markets you'd like to exist... What creates sufficient economic value to drive accurate pricing for all of them? Particularly when, unlike stock markets, economic motives may not predominate for the most invested groups for a given question?
If there are many more investors them markets, maybe the markets are efficient (because there's no $20 just lying around then), but that doesn't sound like what you're describing. Your market-saturated world sounds like one with lots of pennies laying around. And I leave those where there are all the time.
> So it's illegal to run a "pump and dump" scheme in the stock market, but there's no such prohibition on doing it in a prediction market. Once real money starts going into these markets, you'll definitely see people doing things like buying up a bunch of shares in an outcome, creating fake hype to get people to believe that it's a real market trend, and then dumping their shares at an inflated price before reality sets in.
This already happens. One of the nastier moves I saw on PredictIt was to spike a particular market to deliberately trigger other participants' stop-loss orders, though that only works within a narrow range of sophistication.
Aren’t conditional markets set up such that Yglesias wouldn’t lose or gain money betting that O’Malley would win if nominated but he never gets nominated? That seems to alleviate that concern that Yglesias loses money on this, except for the opportunity cost. (It also seems like you can reduce opportunity cost here by using the same dollar to bet all the mutually exclusive conditional markets that condition on different outcomes of the same event. Is that already done?)
4.6.1.1 - This claim that hedging won't bias the markets seems way too rosy. There's not a bunch of people who all know the exact probability and one person using the market for hedging. There are a bunch of people all with different guesses as to the probability and different budgets/amounts of acceptable risks about how much they are willing to invest to correct errors. The (perhaps money weighted) average of these people is the "correct" value that the market should be trying to converge to. But if someone is investing a bunch of money as a hedge (rather than an honest prediction), this will tip the scales somewhat one direction or the other.
4.8: Perhaps the better argument here is that it is *much* easier to bet against a meme prediction market than against a meme stock, making it a lot easier for the market to correct itself.
Predictions markets that only evaluate if the chance is high enough (such as in the case of your comment policy) have some weird effects that I think could invalidate the results, and might not be fixable with the usual "free money" argument. If I wanted to make sure that a comment never reaches your attention, I can vote it down below the threshold for it to evaluate, and even though I am totally wrong on my "prediction", I'll never lose any money. There is still a chance at free money, but now the consequences to being wrong are removed (as long as you are rich enough to overwhelm the market). Perhaps this works better than I am thinking in practice, but especially for low traffic votes like this I think it would be easy to pull off.
On the opposite side, if I predict that you **won't** think that a comment was worth your time upon review, I have no incentive to vote negative below the threshold, since I won't get any of the money I am expecting to make. If I have sunk enough money in, it might even be worth my while to vote positive (against my prediction) in order to get it back above the threshold so that my bets get evaluated. I think this is less easily resolved than the first issue, and you should basically never see prediction far below the threshold because all that does is tie up your money while you wait for the market to close.
You're right, I would also have to randomly check a few that didn't meet the threshold. I've edited that in.
How about picking them with probabilities proportional to market volume? I expect that to be more time-effective that just uniform random.
Prediction markets also monetise disinformation. Instead of looking for mispricing and then getting rich until the market corrects, you can spend money on a disinformation campaign to induce mispricing and get rich until it corrects.
This is not very different from pump-and-dump schemes in penny stocks, but providing a continuous, liquid, anonymous incentive to spread disinformation on *every* topic seems like it should be a concern. Not because the market won’t correct - because of the second order effects of increased information pollution everywhere else in our society.
In the optimal case this provides financial incentives for very robust anti-disinformation detection. However, solving loss of trust by drawing all of society and our information and decision-making platforms into a high-stakes HFT battle for truth might turn out to be like throwing water on an oil fire.
This assumes that the misinformation is coming through a channel that is otherwise considered very trustworthy, or else most people with money invested would probably ignore it or only adjust their bets a small amount.
Or, in the alternative, this means that people who are easily swayed by misinformation will lose money to people who are not swayed, which on net improves the prediction markets.
The benefit of making people put Skin in the Game is that they will necessarily become more discerning about which information sources they actually believe when trading.
I think I'm not understanding why 4.6.1.1 is free money. If I buy a share of Biden at 10 cents, I have a 50% chance of making a dollar, so my EV is greater, but I still have a 50% chance of losing money. Is the free money part:
(a) The EV on that trade being >0
(b) I can at some point sell that share to another trader for 50 cents
(c) I can take a strategy of buying shares for the less-protectionist candidate every 4 years and make money in the long term if hedging makes those candidates are consistently undervalued
(d) The import/export company is also hedging in other markets, so I can bet against them in every market and make an overall profit on those trades
(e) Various groups hedge various markets and I can take a strategy of betting against them in general and make an overall profit
(A). You might lose on an individual trade, but as the number of similar trades you make increases, you'll be more and more likely to gain on net. This might not be worth it for you, but it will be worth it for somebody.
I think the real issue with making a better prediction market is that it's such a niche product. Looking at the top eight most liquid predictions on polymarket they currently have a total liquidity of about $136,000. And there's only about 60 questions total. Let's be generous and roughly double that for $250k total liquidity on site. That's tiny. That's smaller than most minor league baseball games. Let's say there are five equally sized markets. That's still only about a million dollars. Let's round to a million (fair since one of them doesn't use money). Given a casino's 8% take (which would actually probably be lower since this isn't a casino) that's $80,000 in revenue. And that has to cover everything for the entire industry.
I can think of ways to build better versions. But if almost no one's going to use it then what's the point? At those rates I'm not even sure the revenues can cover regulatory costs. Regardless of whether it's a good idea I'd need to be convinced it could survive and hopefully even thrive.
Has anyone considered getting all that rationalist money behind a prediction market in an already high demand area like sports? That's a multibillion dollar industry with heavy existing demand and high growth. Yes, it's not as EA-sexy as stuff about politics or whatever. But fundamentally you'd be developing the same type of skillset and organization and technology. All that which you could eventually pivot into broader markets. Part of the point is such markets are useful for predictions in arbitrary fields. So why not arbitrarily choose the large, fast growing market?
But sportsbetting exchanges already exist. What value would a sportsbetting prediction market add? Come to think of it, Betfair does political bets as well, so I don't see what value political prediction markets would add either. 🤷
I can think of sports betting gambling houses (Fanduel, Draft Kings, etc). But not prediction market style exchanges. At least not in the US. More to the point, if this already exists then what's the point of it at all?
TradeSports was the US version but regulators shut it down ~15 years ago.
The law's changed since then though.
I'm surprised this article didn't look at the UK/Irish/etc. markets as live real-world examples of what a prediction market can do, since there's already fairly large-scale wagering on political and other real-world events. Granted, you've got bookmakers setting odds rather than purely market-driven pricing, but for liquid markets the difference shouldn't matter all that much.
To your point Betfair now owns Fanduel -- in theory the existing betting operators are best positioned to take advantage of eventual changes in the laws/regulations. Sports betting (increasingly legal in the US) is already fairly structurally similar to the sorts or questions that resolve in yes/no fashion on a prediction market.
I'm not sure I agree that you can't disrupt existing incumbents.
I very much agree that doing this more internationally would be a good idea. I proposed months ago that prediction markets, if they truly want to be accurate, need to start aggressively recruiting in other languages and outside of fairly narrow demographics. But that got a "nice idea but..." treatment. My first thought was literally "move to Macau or Ireland or something." But I don't think I could even get them to move from Berkeley to San Jose.
Betfair [exchange] is a prediction market.
"Has anyone considered getting all that rationalist money behind a prediction market in an already high demand area like sports?"
The industry is salivating at this sentence. "Look, a whole new cohort of people who think that because they're smart they can beat us at our own game!" Or, for the stock market:
https://xkcd.com/1570/
(Many of you even know what I just linked to without looking.)
That is my point though.
If you believe prediction markets are important you want resources to be allocated to develop them. The resources necessary to figure out how they work, build the technology, and lobby the politicians. If there's a big pot of resources in sports then it's better that you outcompete incumbents and use that to develop what you think is world-historically important. Especially because if you believe in the morality of prediction markets you probably believe in the morality of sports prediction markets. (Also, I would bet that a bunch of SF nerds can build a better DraftKings.)
That recommendation sounds like "has anyone considered getting EA behind a political campaign?" and as we saw, Carrick Flynn was the wrong candidate in the wrong area to back.
Take betting on this year's World Cup: France, the holders of the cup from the last competition, vs Argentina, and it looked like Argentina were going to win for most of the game. Then France equalised with two goals within two minutes. Played extra time, both teams scored. Went to penalties and the French made a dog's dinner of that so Argentina won.
Even good forecasters would still be uncertain as to who the winner would be, even at the point of knowing that both France and Argentina had made it to the final. Going on past performance would be little help, as both of them had won the cup twice before. Sports betting is tough, tougher than it looks, and getting into that market means you have to believe you can do better than the bookies. A lot of people have gone bust thinking they could do that.
The difference is that while I doubt EA has many successful politicians I'm 99% certain that EA has a lot of successful startup people and math nerds. It's actually in their area of expertise.
Firstly, great post!
Many of these examples are political questions, which you would always expect the masses to be right about in aggregate, since the democratic process is about aggregating opinions. Some of them are less political. But what about a question like "will it rain tomorrow in New York?" To make a bet on this question, the only sensible strategy would be to check what weather modellers are saying and bet with them. But because this is the only winning strategy, would anyone actually make a bet here? I guess the thrust of my question is - shouldn't there be very little money to be made on problems that are genuinely hard?
I think the phrase "weather modellers" is doing a lot of the work here. If there's one universally acknowledged best weather modeller, then this reduces to the Nate Silver example in 2, and yes, everyone should agree.
If there are many modellers and nobody knows who's best, then this reduces to the competing experts example in 3.5, and a prediction market will aggregate them efficiently.
If you're an amateur weather modeller yourself, and think you're the best, then you should consider betting on your own opinion, as in 3.4, and making money if you're right.
Even in the Nate Silver case not everyone should agree. Supposing he is the best modeler doesn't mean that finding out what another modeler thinks shouldn't shift your probability. That's basically private information like knowing some Dem canidate for the house has a dark secret no one else knows about (should shift your probay slightly).
Also, let's assume Nate Silver is the best predictor and people follow him more or less blindly in prediction markets. Now he can (or could, with enough scale) make a lot of money by making a faked prediction and secretly betting against it.
Theoretically doable under some circumstances, but note Nate's argument for why he doesn't bother betting the model line in existing markets: the reputational returns on making the model as accurate as possible far outstrip what he personally could make by betting.
Currently, for certain, but that's because of lack of scale. Once enough money is involved, people (not everyone, but some) _will_ start to misbehave. Betting and gambling aren't exactly clean businesses.