
Prediction Markets: When Do They Work? - lainon
https://thezvi.wordpress.com/2018/07/26/prediction-markets-when-do-they-work/
======
wpietri
Ok, having finished both articles, a few thoughts from somebody who has been
involved for years in the subsidized prediction service Long Bets:
[http://longbets.org/](http://longbets.org/)

Broadly, I think he's right. Subsidized prediction contexts could provide real
social benefit. It can force a lot of attention and thought around topics that
don't get enough consideration. I would love to see, for example, a bunch of
VCs covering the costs on a prediction market for the tech sector. Have a
bunch of standard running questions, and let the VCs ask any question they
want.

I think he is 100% correct that having well-defined bets is hugely important.
We got our initial bets by careful, personal assistance to get people with
contradictory opinions to agree on clear, testable criteria. We thought once
we got going people would just do that on their own, and we were wrong.
Sometimes it happens, but pretty rarely.

I wonder about the extent to which his emphasis on speed is about a particular
kind of participant (e.g., sports gamblers and day traders). Most of the
people I know who invest work at the months-to-years timescale, so I suspect
there's an untapped cognitive surplus from people like that which could be
applied to longer-term questions.

I also think his notion of subsidizing market makers (who are obliged to
provide liquidity) is a good one. I used to work for a market-maker and it was
not a bad business to be in. His no-fees market makes that trickier, but I
don't think it's unresolvable.

One subsidy option that I'm surprised is not here: guarantee a minimum purse
for people on the winning side of a question. _Somebody_ is going to show up
to try to get the free money. And then somebody smarter is going to say, "I'd
bet I can get a piece of that." I know it wouldn't take much for me to place
some bets on some current hot issues. E.g., blockchains, Bitcoin, Uber,
scooters, VR, AR.

~~~
skybrian
I think it might be less an emphasis on speed and more about whether you are
interested in making money (or at least the logic of making money), and
therefore compare bets with alternative investments. Serious gamblers are at
least going to compare with alternative bets, and being able to place more
bets over a year with the same bankroll is an advantage if you have an edge.

More broadly, if you squint a bit, the stock market looks like a betting
market that's subsidized by company profits. It would take quite a bit of
subsidy to compete with that.

I suppose cryptocoin shows that people will bet in unsubsidized markets, if
part of the bet is whether they will later be subsidized and to what level.

Edit: it seems the URL changed and we are responding to different articles.

~~~
thaumasiotes
> Serious gamblers are at least going to compare with alternative bets, and
> being able to place more bets over a year with the same bankroll is an
> advantage if you have an edge.

This is only true under one of two assumptions:

1\. Your edge on the long bet is numerically similar to your edge on the short
bet, such that making more bets means getting more money overall.

2\. You're looking to stabilize your earnings by placing a large number of
bets, even at the cost of lower expected gain.

There's no reason winning more bets automatically means more money. The longer
bet might have longer odds.

~~~
skybrian
It certainly could be, but the longer bet needs to pay off more, to account
for the money being locked up longer.

Or to put it another way, to compare bets that pay off at different times, you
would need to calculate the present value of each payoff using some sort of
discount rate:

[https://www.investopedia.com/walkthrough/corporate-
finance/3...](https://www.investopedia.com/walkthrough/corporate-
finance/3/time-value-money/present-value-discounting.aspx)

~~~
pinko
And a transparent betting market would do that math for you, and display it.

------
nabla9
For political, other major events or sports betting, normal brokers are more
efficient. They have spread something like 5% or less. Financial markets can
be even more efficient. Existing betting markets typically take something like
10% for the same bet. There is little reason to go to them unless there are
some rare arbitration opportunities.

I think these new prediction markets should differentiate from traditional
betting markets in some meaningful way.

One possible idea: marketing the skill. Turn prediction market into expert
market. People would invest money to experts (individuals, syndicates even
algorithmic syndicates).

Rough idea: trading is anonymous until the underlying is settled. Then the
market participants get a cumulative score they can use to sell their
experience and get investors. The system would show the expected value form
investors, quantified risk and uncertainty. Individual investors and investor
syndicates can start with very little cash and demonstrate their skill.
Complete nobodies could become renowned experts over time and sell their
expertise.

This would could be very good way to provide value in emerging markets. Some
Kenyan or Vietnamese market or political analyst could emerge from nothing
over few years and sell their expertise to bigger players without PowerPoints,
marketing skills and connections.

~~~
arisAlexis
there is no book spread in Augur though that's the point. Pure p2p gambling

------
qwtel
I used to be excited about prediction markets for a while, but I've since
accepted that, except for some niche applications, they won't be terribly
useful and possibly even dangerous.

I was ultimately convinced by NNT's arguments, that a) prediction is the wrong
thing to focus on (robustness or "anti-fragility" to wrong predictions is) and
b) humans aren't good at predicting [the outcomes of complex systems] one way
or another. PMs may be better than expert panels, but reality doesn't award
extra points for being marginally less wrong.

Prediction markets are also called "information aggregation markets" and in
that capacity they may be useful. Assuming all relevant information is out
there, but doesn't properly propagate upwards a hierarchy for "behavioural"
reasons (e.g. nobody wanting to be the face of bad news), then an anonymous
(!) market could be the way for information in the low ranks to move where it
is needed. In this case, there is hardly any "prediction" involved, and I
assume it could work for that reason.

------
wpietri
This is basically unreadable without the previous article in the series. It's
linked at the top, but this is it:
[https://thezvi.wordpress.com/2018/07/26/prediction-
markets-w...](https://thezvi.wordpress.com/2018/07/26/prediction-markets-when-
do-they-work/)

~~~
dang
In that case maybe we'd better switch the URL to that and leave the second one
here: [https://thezvi.wordpress.com/2018/08/17/subsidizing-
predicti...](https://thezvi.wordpress.com/2018/08/17/subsidizing-prediction-
markets/) (originally posted as
[https://www.lesswrong.com/posts/AeKS2m6uLM8RYfvND/subsidizin...](https://www.lesswrong.com/posts/AeKS2m6uLM8RYfvND/subsidizing-
prediction-markets)). Thanks!

------
dmurray
The article shows an excellent understanding of gambling and financial
markets, but it's let down by the author's surprise about the terms of the
"ETH over 500" bet.

This is a variation of a quanto future, which is well known and well
understood in derivative pricing circles (see Wikipedia link). If you can
price ETH/USD options, you can price this. Possibly it should be called a
binary quanto.

[https://en.wikipedia.org/wiki/Quanto](https://en.wikipedia.org/wiki/Quanto)

------
nostrademons
"Insider trading of securities is illegal....The problem is that it drives
people away.

This is an interesting observation in light of some conversations I've had
with 20-somethings who have abandoned the stock market in favor of
cryptocurrencies.

For a couple decades now, the message has been "you can't beat the stock
market. You're competing against top mathematicians who do this for a living
and colocate boxes in the exchange so they can execute trades faster than you.
Why even try when you're just going to be the sucker for some finance
professional? Go invest in index funds instead." (Note that this advice is
quite self-serving for a fund manager: it justifies the huge fees they charge.
It's also quite self-serving for index funds, which compete on price.)

It seems like the youngest generation - the ones just leaving college now -
took this to heart and figured "Well, if there's no point for us even trying
in the stock market, let's just throw the whole thing away and invent a new
asset class", cheerfully ignoring that they are also throwing out all the
regulatory protections that protect against insider trading.

Even _with_ all the SEC's insider trading laws, the existence of vast computer
systems capable of crunching terabytes of data and executing a trade in
microseconds now creates such an information imbalance that people are leaving
the market anyway.

It makes me wonder if all markets have a natural death. As they get more
efficient, liquidity dries up. Fewer and fewer people bother playing when they
_know_ that someone else is just going to get rich off them. Eventually the
winner becomes like the kid on the playground who insists on winning every
game; all the other kids refuse to play with him, and he's left shooting hoops
perfectly alone. Meanwhile they go off and create a new game that is fresh
enough that new entrants might actually have a chance - at least until
somebody becomes really good at _that_ , and the cycle repeats itself.

~~~
bluecalm
I think you are over-estimating thinking process of people who buy crypto-
currencies. I think vast majority buy them because of greed and ignorance
about technology (they believe it's really the next big thing because that's
what this or that popular blogger or video maker said). It's like buying a
lottery ticket but it's easier to believe the chance to get rich is bigger.

>>It makes me wonder if all markets have a natural death. As they get more
efficient, liquidity dries up

100% efficient markets is dream come true for individual investor. Stocks
represent equity in something that produces value. You want to put your money
there at some point in your life and you want to sell that for cash at a
different point in your life. There will always be people in accumulation
phase and there will always be people in cash-out phase. The more efficient
market gets the less likely you are to make a bad decision. Market efficiency
cause by very good fast traders is fantastic for individual investors.

Imagine you hold for example AMD stock before recent earnings. You want to
sell because you need cash. If the market weren't fast to react you (unaware
of the results) might have sold for much less than the stock was worth. Those
fast reacting traders just saved you whole bunch of money and you got a better
price.

Sure, it's more difficult to buy something dirty cheap but remember that only
happens if the other side is uninformed. The more efficient the market the
less losses caused by information asymmetry and the more time saved which
would otherwise be needed for research.

That being said I think the markets are far away from being efficient today.

------
mlthoughts2018
Always worth a read in these discussions. Hanson has a prediction market
business, Consensus Point, so there’s at least two sides to the issue:
convincing specific customers to care vs the general applicability.

[https://www.cato-unbound.org/2011/07/13/robin-hanson/who-
car...](https://www.cato-unbound.org/2011/07/13/robin-hanson/who-cares-about-
forecast-accuracy)

Hanson is not naive about the social and political barriers. This goes far
beyond prediction markets, extending to all kinds of uses of forecasting and
statistics in industry where political gatekeepers want to control the
implications of models, rather than caring about objective truth first and
mollifying it towards business concerns second.

------
seibelj
Eventually an anonymous prediction market will take off, and that will be the
end of insider trading enforcement. People in the know will bet on the stock
price via the prediction market, and the market will react based on those
bets.

~~~
baq
The article clearly says what will happen: there won't be enough participants
that would be willing to be suckers in that market, hence it'll die quicky.

~~~
arisAlexis
an article cannot clearly predict what will happen. It can assume. Don't take
it as Bible and keep an open mind into the future.

~~~
nostrademons
Sounds like a job for a prediction market!

------
Agnosco
For anyone interested in this field should take a look at the work of Ulrik
William Nash. I had the pleasure of completing a course led by Ulrik as well
as writing an internal paper with him as my supervisor:

His main paper on wisdom of crowds and skew, which is rigorous (free):
[https://journals.plos.org/plosone/article?id=10.1371/journal...](https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0112386)

Short presentation: [https://www.youtube.com/watch?v=yqTbzSHi-
UQ](https://www.youtube.com/watch?v=yqTbzSHi-UQ)

The paper above is worth reading for anyone interested in the utilization of
collective wisdom.

------
40four
Seemed like an interesting article until halfway through the 1st paragraph,
(on mobile) a full screen ad locked down my whole screen and caused me to
close the broawer tab. Booo

------
kolbe
>The biggest market there, by far, is on whether Ether will trade above $500
at the end of the year. This is an interesting market because Augur bets are
made in Ether. So even though the market (as of last time I checked) says it’s
74% percent to be trading above $500 and it’s currently $480 (it’s currently
Thursday, July 26, and I’m not going to go back and keep updating these
numbers). When I first saw this the market was at 63%, which seemed to me like
a complete steal. Now it’s at 74%, which seems more reasonable

Hi. My job is to essentially figure out reasonable probability distributions
for securities on which to price derivatives contracts. Certainly, due to some
securities having negative skewedness, it's common for a stock to have more
than a 50% chance of going up. I've seen it as high as 65%, but the
counterpoint to that is that there's usually very small probability that it
goes a lot higher.

I would love to know what probability distribution this guy is using to think
that the probability of going up over $20 being 74% is reasonable.

~~~
dmurray
As I read it, it says a 74% chance of going up if you look at the market
naively and forget that it's priced in ETH. Since it's priced in ETH, you
can't derive the probability that ETH goes up directly - there are an infinite
number of sets of probability distributions that are consistent with any
price. If it goes up, you get paid off more (in USD), so if you thought the
odds were 50% of it going up and you were offered an even money ETH bet, you
should jump at it.

------
lordnacho
Sounds a bit like a change of numeraire he's talking about there wrt things
being prices in Ethereum.
[https://www.math.nyu.edu/~alberts/spring07/Lecture3.pdf](https://www.math.nyu.edu/~alberts/spring07/Lecture3.pdf)

------
randomracer
What about a market that brings together buyers and sellers to bet on how
companies are doing? A share price is really a function of how we expect a
company to do in the future, but what if we bet on specific metrics? For
example, I expect Company A to hit $100 in gross revenue this quarter, so I'd
like to bet on it - as opposed to the several variables that affect share
prices. The share price may reflect the Company's guidance - but revenues it
expects in the future, but not really a reflection of history. This could also
be a bet on other metrics - Snapchat number of users, etc. etc. I'd argue that
this can be a more rational betting market. There are several metrics that
aren't 100% correlated with stock prices.

------
ryeguy_24
I’m new to this concept. Can someone help explain how prediction markets are
used for good? Given that this is a zero sum game, isn’t this just
facilitating the transfer of money between the winner and the loser.

~~~
adam
In the public context, people often cite the consensus predictions to get a
better understanding of what people _think_ will happen vs. what they _want_
to happen.

In a corporate context, prediction markets are often used internally amongst
employees to predict things like sales forecasts, ability to hit milestones,
budgets, quantify risks, and predict the outcome of strategic initiatives.

In both contexts, people tend to participate anonymously so they have the
freedom to express what they actually think. Contrast this, especially inside
a company, with the politics of saying what you actually think. That "reality
based" discourse is unheard of, especially in larger organizations. Prediction
markets are often the only venue someone can express themselves in a
productive way.

------
arisAlexis
I hooe you welcome some critique:

> Remember, if you can’t spot the sucker in your first half hour at the table,
> then you are the sucker.

given there is no insider information in this case, this holds true to the
stock market too.

> There’s a lot of interest in what the odds are, but the volumes traded are
> quite thin, so much so that it is in the interest of partisans to trade in
> order to move the price and thus change the political narrative.

true when these markets are only a couple of bookmakers. Also true when there
is a goobalized easy access anonymous system without a bookmaker's fee? Not so
sure.

------
paulpauper
sports betting and commodities futures could be considered types 'prediction
markets' that seem to work pretty well. The reason why prediction markets have
not caught on is due to regulation and that most markets are tiny and prone to
manipulation and low liquidity.I also think that insurance acts as a counter-
party instead of having to use a market.

------
blacksqr
If prediction markets are of any value, couldn't you set one up to answer this
question?

------
conjecTech
Ugh. I'm torn when I see things like this. I sincerely like the rationalist
community, but I never quite engaged with it. And posts like this seem to
confirm that it was probably a good decision on my part.

The author identifies 3 successful instances of what he wants to exist, and
then fails to ask the question of "how do they accomplish what I want to?"

In particular, one of the marketplaces, the financial markets, is several
orders of magnitude larger than the others and has a huge vested interest in
getting issues like this right. And they largely have.

For instance the capital issues are handled through a broker system, where the
aggregation of opposing bets allows for mitigation of risk from margined bets,
and the settlement processes, such as daily settlement of price differences in
futures.

If you're trying to build something complex, it's probably a bad idea to start
from a blank slate. A lot of our existing solutions were hard-won, and it
would be a shame to simply discard that understanding. The programming
community, and others connected to it, seem to disregard history and existing
institutions as obsolete or to be distrusted. For a field that's less than a
century old, that's somewhat defensible. Nassim Taleb makes the point in
Antifragile that ideas usually have something akin to a constant hazard rate.
Something old which is still used is less likely to be replaced than something
that has only been around for a short while. The nascency of most of science
makes it hard then to determine what is and isn't fungible. But marketplaces
are as old as trade. The aspects that we see in them are far less arbitrary
than you'd think, even if it's hard to express exactly why they are there. If
you're going to work at building another version of something that has been
around for so long, you'd be wise to start by analyzing and understanding what
is already out there. I think it's the engineering equivalent of Eric
Weinstein's policy around talking to people you know to be intelligent. If
they seem to be saying something obvious, they are probably saying something
subtle. And if they say something that seems wrong, they may instead be saying
something counterintuitive. Similarly, if part of an antiquated system that is
still in use seems to be useless, needlessly complex, or downright harmful,
there is a good chance that you simply don't understand it.

I was really excited last year when I saw some people within lesswrong trying
to become more accommodative and appreciative of "hufflepuffs" within the
community ([https://www.lesswrong.com/posts/DbdP8hD2AcKcdSsgF/project-
hu...](https://www.lesswrong.com/posts/DbdP8hD2AcKcdSsgF/project-hufflepuff-
planting-the-flag)). I really hope that effort continues and sees fruition.
Hangups like this could be easily spotted and remedied by having a contingent
of people who are less philosophical and more battle-hardened within your
ranks.

~~~
browsercoin
yeah I had a very strong skeptical attitude while reading the article. For me,
it raises some flags when it's alleged the author is in the business of
selling prediction markets, you are gonna read only the good parts.

I find it hard to believe that a prediction market will be able to outperform
hedge funds. It's an open secret that insider trading is rampant despite SEC
enforcement, so unless those hedge funds are participating in these prediction
markets, it's hard to put any value especially at this early stage.

I can definitely see a use for internal opinions, like, do we need a new CEO?
and then putting the equilibrium forces of an efficient market to work. Best
Buy tried it and I'm not sure if it's still being used decade later.

~~~
adam
Actually, prediction markets need some sort of objective, verifiable outcome,
so asking "do we need a new CEO" wouldn't be appropriate. Instead the company
could ask questions related to the performance metrics the CEO has agreed to
meet. "Will we meet sales levels of X?" "Will we achieve x% market share in Y
product by Z date?" etc.

And based on the probabilities output by the market, if they were low and
trending lower, one could argue there is at least a perception that this CEO
isn't getting it done. Or another response could be "why" which could
encourage a more open, healthy dialogue internally.

------
blazespin
Weak. Any proper treatise on this would be mathematical. A comparison of polls
versus prediction markets would be appropriate, based on intervals of
confidence.

------
Havoc
I seem to recall at least one instance where the prediction markets absolutely
killed it on the US state elections, so yeah I'd say yes.

------
Bucephalus355
Prediction Markets were at one time supposed to be the “secret weapon” of
neoliberalism. They would so predict the future, that corporations would
become unstoppable, much like the company that hires Ben Affleck in the movie
“Paycheck”.

Most laughably, in 2003, Admiral John Poindexter, thought it would be a
brilliant idea to launch a “terrorism and coups-d’etat prediction market”.

About 2 months after it launched, he became persona non grata in the
Washington defense scene and was forcibly retired from DARPA.

[http://www.cnn.com/2003/ALLPOLITICS/07/29/terror.market/](http://www.cnn.com/2003/ALLPOLITICS/07/29/terror.market/)

[https://en.wikipedia.org/wiki/Policy_Analysis_Market#Proposa...](https://en.wikipedia.org/wiki/Policy_Analysis_Market#Proposal)

~~~
arisAlexis
well decentralisation so oves this problem exactly

------
nonbel
I would bet there is almost no overlap between the people betting in
prediction markets and those who dont screen email/websites/calls (ie, answer
polls honestly).

