Prediction markets are an interesting tool for determining the most likely answer or result for almost any question. Some economists hope that we could use prediction markets to make difficult political decisions. Many companies already use them internally.
Sadly there's only one prediction market that's accessible from the US, and it's an academic project with a 10% fee on profits and a 5% fee on all withdrawals. It's also limited in what you can predict or bet about. Augur or some other decentralized solution is probably our best bet for developing prediction markets further.
I really think these markets are the key to overcoming our failure to make good political decisions. It is a wild idea, but I don't know of any other solutions that directly incentivize truth-seeking.
Vitalik Buterin actually wrote about these concepts in more length
It's karma-driven rather than wager-driven but seems fairly active.
If I could paraphrase Charlie Munger, in the stock market, the only people who are successful long term are those who bet massive sums, very rarely, when they are sure that the price of a security is severely and unproperly valued.
If Tesla is currently trading at $355, and you have evidence for yourself that it should be worth something like $0 or $3,000, then this would be an example of the current market prediction being extremely wrong.
A stock's price is really just a prediction of the company's future cash flow in the event of profits, losses, sale of assets, so on.
 - https://www.rentec.com/
 - https://www.twosigma.com/
 - https://www.citadel.com/
 - https://www.mlp.com/
 - https://www.deshaw.com/
 - https://www.worldquant.com/
Basically on very quick trades machines outperform humans. For long term investment a prediction market (stock market index) outperforms humans and machines.
These firms make many thousands of trades per day, year after year. They have multi-year track records of exceptional returns.
If their edge was truly no better than random then they would have been bankrupted years ago. You can do some back of the envelope math to easily convince yourself of this.
the academic consensus is that as soon as you create a second incentive (the prediction market itself) you lose all the insight you could gain from external factors. At that point they are no better than simply looking at the stocks (the predicted market). hence prediction markets are by definition, useless.
the cristall ball people still trying to make it happen are now trying to see how much they can limit the prediction market itself for it to not affect itself (hence the limitations you don't like on the one you mention)
If you have a prediction market on a prediction market, that mess reduces to a prediction market. Quelle surprise!
Are you assuming that prediction markets are only over stock prices? What about a market about the winner of the next US presidential election?
IIRC, those exist, were the focus of attention a few cycles back (because cherry picked just right they were arguably better than polling in the cycle preceding the attention), but as soon as media started paying attention to them, people started diverting money to them to manipulate the results, because there are plenty of people that care more about influencing the result of that question (and it's one where perceived likelihood influences the actual behavior that controls the result) more than predicting it.
That kind of thing is actually a significant problem in many of the areas where prediction markets have been hyped.
What's the evidence for people putting in large amounts of money to influence betting on elections?
Isn't it making a bit assumption that people vote in a certain way because they see things in prediction markets?
Regular people are surely not checking odds on who is likely to win an election.
Going back and reviewing things it seems my memory was wrong: the risk of coordinated efforts of this type if the prediction markets became seen as strong bellwethers of electoral success was discussed in the wake of some isolated, apparently single-trader incidents that momentarily moved the prediction markets in 2004 and again in 2008, but there doesn't appear to have been any detected widespread manipulation.
> Isn't it making a bit assumption that people vote in a certain way because they see things in prediction markets?
No, there's a pretty strong well-known effect that media coverage of electoral momentum reinforces that momentum; it's not doing much changing cited as impacting enthusiasm and turnout.
> Regular people are surely not checking odds on who is likely to win an election.
People—especially the people who are reasonably likely to vote—to consume political news, including news relating to whatever the media sees as strong horserace indicators. For a few cycles startibg around 2000 that had started including prediction markets, though it seems to have faded the last couple cycles.
see the problem?
"How long would it be before you saw traders investing in a way that would bring about the desired result?"
As in, if one found a way to bet against your car remaining in tact and realized sabotaging your car was cost effective to manipulate their bet, then they reap the market pay out. Is this good?
You just described insurance fraud. And just like in insurance, the fix is to be very careful about how you describe the "win" condition—not just "will the car become damaged" but "will the car become damaged through no fault of the owner" (to begin with; the actual terms would be much more complex).
Incentives in smaller markets (e.g. local elections, or personal car crashes as you say) are super interesting though.
I'm admittedly naive in this subject, but the name calling doesn't help.
On the second point - there is solid evidence that, yes there are ways to pick stock besides JUST analyzing the company - see Momentum investing https://www.aqr.com/Insights/Research/Journal-Article/Fact-F...
I've seen plenty of critics of the efficient market hypothesis, and Fama himself has said that the market is not efficient.
A prediction market is an attempt to leverage a hypothesized predictive power of aggregated
betting, so being used for being is essential to being prediction market.
> Some economists hope that we could use prediction markets to make difficult political decisions.
Political decisions aren't verfiable fact questions, so they aren't really subject to prediction markets. You could use them as a tool to get possible answers to fact questions supporting policy decisions, but there is no real compelling case for them being better than the best available other methods in most domains for that, and in any case getting answers on fact questions related to policy decisions isn't even the hard part of getting good policy decisions.
> Political decisions aren't verfiable fact questions, so they aren't really subject to prediction markets. You could use them as a tool to get possible answers to fact questions supporting policy decisions, but there is no real compelling case for them being better than the best available other methods in most domains for that, and in any case getting answers on fact questions related to policy decisions isn't even the hard part of getting good policy decisions.
i wish this comment/POV had gotten more traction in this thread. i am increasingly of the opinion that building consensus on values and goals is more of a problem in politics than is building consensus on facts.
What I like about financial/forecasting crypto projects like Pareto Network is that there is no capped upside, and you can still determine the conviction some people have about an outcome
A close runner up is Numerai, given that you can tell the 'confidence' someone has, but the capped upside is arbitrarily capped, and the purpose of the project has nothing to do with censorship resistance and is beholden to the whims of the Numerai hedge fund.
Unless I guess if you want to make sure the trade goes through immediately?
makes it less appealing to some (or many) and less efficient in determining an outcome
yes assassin markets and popular political events can now be traded in the US even if the Augur company gets sanctions, but for everything else this is an inefficient system.
I'm not sure what alternative you are considering to not have that problem, or what it would look like for something to not have that problem.
I gave two examples. One isn't in production yet so we'll see
But in order to do that, wouldn't you also have to know a lot about those people?
If you bet $1 and I bet $50 that could just mean I have a lot more money than you. Or for a million other reasons, I'm pretty likely to have not exactly 50x your conviction. I may even have less conviction than you.
And even this is assuming good faith, because I might have reasons other than "winning" for placing my bet.
The whole point is that a sufficiently large and diverse groupe of people is better at predicting the future using those system than an individual. Being able to correctly predicting the future can lead to better decisions.
It's not that they're totally accurate, it's that they're as accurate as it is possible to be. Why? Because if you knew of a better way to determine the truth, you would do so, trade on that information, bump up (or down, if shorting) the price to reflect that information, and take your profits so you could do so again. Conversely, if you're just trading randomly, somebody with better information will take all your money and you won't be able to continue trading.
The price that's reflected in a market could be considered residual uncertainty that nobody knows, i.e. if the prediction market for "Will Donald Trump win the 2020 election ?" sells at $0.60 on the $1.00, it means that after all the market participants have crunched their models, aggregated their polls, gone out and canvassed neighborhoods, ran their economic analyses, spoken to campaign insiders, and whatever else they can do, the equilibrium price assumes he has a 60% chance of winning. You don't have to actually perform all those information-gathering tasks to figure this out, you can assume that other people have been incentivized to do so and their results are now reflected in the price.
Plenty of market participants are not actually doing this. Day traders, high speed traders, even index funds come to mind. And even "real" investors are influenced by psychology that has little to do with an impartial analysis of all possible information. (It's not what you know, but what
"everybody knows that everybody knows" )
Quant high-speed traders (and arbitragers) are using information in a different way. Typically, the way these strategies work is that they discover correlations between prices. For example, when China enacts tariffs on soybeans in response to Trump's tariffs on steel & aluminum, that's going to depress demand (and hence prices) on soybeans. However, it will also have a lot of knock-on effects on other industries: shipping companies transporting soybeans will lose money, railroads connecting soybean farms to the Great Lakes will lose money, railroads connecting soybean farms to domestic demand will gain money, ranchers and chicken farms and other domestic food producers who use soybeans as feed will gain money, commodity traders could go either way, house prices in wealthy Chicago neighborhoods might increase if commodity traders are making a killing, etc. Say that the inside information entering the market is "China is enacting tariffs on soybeans". A bunch of people with that information will short soybean futures, and then it's the job of an HFT to spread that information through all the other markets that it may affect, updating the relevant prices on their securities before the profits actually trickle down through the economy.
Index funds are the freeriders of the markets. The philosophy there is that all of the work that people do is going to produce some value, and the shareholders will capture some of that value as returns to equity. And if the rest of the financial system is functioning effectively, all of this will be reflected in prices. So rather than worry about what the price will be, just buy & hold securities in proportion to their value, let the price mechanism do its job, and profit in proportion to the initial amount of capital you put in.
So the low volatility of the stock market would indicate that it is actually predictively accurate, and that it is getting more so.
Then again, volatility is kind of a silly measure, because we also care about the frequency domain. The market could be very good at predicting the very short term or the very long term or both.
I wonder what a Fourier transform of the market would show?
That doesn't make sense. Sure investors can be accurate in the long run, but the market itself just reflects the price today.
But really the idea is more about a feedback mechanism in which successful predictors those who are successful at making predictions end up with more money to invest back into the market making more predictions. So its a weighted average of the masses, in which those who are successful predictors get weighted more heavily in virtue of their having more financial capital with which to invest. For that to work well, you really need a reasonable level of participation. Also, if the inputs from new participants continually outweighs those from experienced quality participants, you are not going to get good predictions. Also, you have to have a rock-solid mechanism to decide the market, or it will be gamed.
The idea is not that an untrained mass of people are necessarily better than experts. Instead, it's that some people, with training, can learn how to make good predictions about many different fields. These predictions exceed the predictions of domain experts.
Especially being their work is in the prediction market space and covers a lot of the current limitation issues we face.
Source Link: https://medium.com/@iCash.io/processes-for-arbitration-on-sm...
Still a very cool platform. A lot of people use predictions.global to get a birds eye view of the markets.
And the Discord channel is always busy. The mods there are very responsive.
1. A big selling point of these markets is that there are theoretical commercial value to predictions- i.e. a company could get information of the likely success of their new product line ahead of time, to help them make strategic adjustments. However, Robin Hansen (one of the top economists working on betting markets) says, counterintuitively, that industries have been very luke warm about actually doing this in reality, for various psychological and economic reasons (he got into this in his econtalk interview I think)
2. Suppose bets on Augur start ramping up- How do we know these are real bets from real customers? The Augur company has immense funds on hand and its easy on blockchains to simulate fake volume through anonymous accounts. I have no reason to doubt the ethics of the Augur team, but it's unfortunate that if their marketplace starts taking off that it'll be so hard to tell how organic the growth is.
I think that the relevant term is liquidity
It also allows different predictions to be linked, so that you can bet on the outcomes of two events, or on the outcome of one event given a particular outcome of another event.
Augur initially planned to implement an automated market making scoring mechanism, but changed the dynamics during alpha testing.
Wasn't obvious to me. Can't a prediction stand alone, as in real life?
Without skin in the game you end up with manipulated values.
“Today, Augur had 30 active users and 123 transactions in the last 24 hours. The market cap is roughly $269.2 million. That means that each active user is now worth roughly $9 million.”
Copying my comment from below:
Please note that an "active user" is an active address( i.e one that has made a bet on the platform) in the past day.
This doesn't take into account users that made a bet in the past( most bets have long term horizons, >4 to 5 months) or users that have a current position but aren't betting anymore or users simply observing the markets( looking at a front end like predictions.global)
Also note that active users is probably not a great metric for this application, as it's not a consumer app/ time sink thing.
Money at stake is much a better metric
Built on top of IPFS
Augur.casino runs their own node of Augur but runs it on IPFS, allowing others to connect to it.
Provides convenience if a user doesn't care about decentralization.
Just btw, I'm not affiliated with augur or augur.casino or any of these projects. I just find them interesting
Whether this actually works over the long haul, we'll have to see, but it's a pretty interesting experiment.
This means a sybil attack can be launched by anyone behind the Augur project (assuming they set aside large reserves of REP for themselves, how would anyone know?), or anyone who acquired thousands of ETH in the presale for $0.50USD, or anyone with excessive capital can attack any Augur "prediction" and manipulate the outcome in their favor.
Augur essentially gives total power to manipulate "truth" though tokens / capital.
(edit, downvoting to suppress information? please explain why this post is wrong)
I was about to say they do depend on a REP-weighted majority attempting to maximize the amount and value of the REP they hold. But that's not actually true since the forking mechanism lets a significant minority fork off in their own direction. This is the final backstop that (theoretically) prevents outcome manipulation by a majority REP holder; the general public can just switch to the fork that told the truth. On that fork, the liars will no longer hold REP.
This would be a big deal but it shouldn't happen often, since the credible threat helps dissuade liars in the first place; they'll lose money and fail anyway.
But I don't know what happens to the ETH at stake in this scenario.
(Btw it wasn't me downvoting, these are good questions. I'm not with Augur and don't even hold REP. Have an upvote.)
Can anyone comment on how settlement actually works? A persistent problem with new tokens is handwavy explanations of absolutely core features. With a human legal system, humans can argue over intent. When “code is law”, pure intentions alone will not do.
I would love to use a functioning prediction market, and I believe it may be one of the legitimately useful non-money applications of blockchain. But I really wish they would focus on explaining how it solves the key problems rather than marketing the concept.
The Augur whitepaper explains the gory details, but at a higher level when the market creator defines the prediction market and event states through a smart contract, they must also specify the "designated reporter" and the "resolution source". The designated reporter should be somebody you trust (perhaps even yourself) to report on the event using the specified data source.
If the final event state is invalid, then you (the market creator) forfeit your validity bond, which is a form of punishment for creating a market that ends up in a state of ambiguity.
If the event state is valid (i.e. one of the set of outcomes that can be unambiguously determined) then the settlement proceeds.
After settlement finalizes, reporters get their REP token payout, market creators take their ETH cut, and traders who still hold shares corresponding to the settled reported outcome get their ETH. I believe each reporting cycle is still 7 days.
There are some edge cases where an event outcome can be disputed by other reporters in case the designated reporter is incorrect, but the system economic incentives are such that this type of behaviour is heavily discouraged.
In augur the community seems to determine this based on how much they spend to reconcile the transaction. So lots of people could tip the scale. On big tickets this would likely attract attention, but on smaller items it could be a problem unless members of the community have reputation and identities.
It seems like, from reading the faq , that it really just boils down to a proof of stake consensus method with multiple rounds of dispute before and after a market is finalized. With a documented fork procedure. So if consensus gets manipulated, it is very clear and the market itself loses reputation through that they tried to design in their fork process. But would also get likely checked by a “hard fork” away from whomever is running that particular blockchain and manipulating accounts.
The “ethics arbitrage” opportunity would be to look for markets where the outcome is realistically fuzzy “did someone lie” or has an invalid outcome and tip the scales without detection.
And the more one thinks about it the more obvious it becomes. Two ways to think about it:
1) The initial market is betting on an outcome -- how is that different from the dispute resolution phase, which can also be reduced to betting on an outcome.
2) Imagine a purely imaginary event -- and read the whitepaper with that in mind. All of the the processes set up still function perfectly -- as designed. In fact there is no need of a real event. So if there is no need for a real event, why is there an impetus to report a real outcome even if there is a real event.
That isn't to say it can't work, but if it does it will be through trust and community norms, not Ethereum.
This doesn't take into account users that made a bet in the past( most bets have long term horizons, >4 to 5 months) or users that have a current position but aren't betting anymore or users simply observing the markets( looking at a front end like predictions.global)
Isn't the reporting part qui susceptible to a sybil attack?
https://www.augur.net/whitepaper.pdf covers the security assumptions pretty well.
Write a program to take the opposite side of any bet that you can hedge in the public market.
For example: if someone bets against Tesla, and you can take the opposite side, but (more) cheaply offset your risk in the option market.
If the prediction is tightly bounded (e.g. "Mr. X will be killed on Sept. 3, 2018") then you warn the victim.
If the prediction is loosely bounded ("Mr. X will be killed within the next year") then the odds won't be nearly as good, since many non-assassins may bet in favor. The assassin will have to put up a larger bet for a given payoff. Having done that, the assassin wins even if a different assassin does the work, so there's a public goods problem among assassins, and they all have some incentive to stay home playing Call of Duty instead.
If you approach it this way there is no reason all bets on the "bad" side have to have "bad" intentions.
Making it easy to hire an assassin anonymously is why I find privacy preserving coins like zcash scary, despite valuing my privacy highly.
But I don't know if it ended up like that in the final version
For such items platforms like metaculus.com and Good Judgement seem more likely to provide more useful predictions, but without the ability to hedge against events that prediction markets have.
I discuss this in depth in this podcast:
The site acts like the main challenges are legal when really they're technical.
The one area where blockchain based gambling might offer a significant theoretical advance is games when all the gambling is contained within auditable code that's provably actuarially fair, but people generally don't get interested in slot machines because the ability to audit expected return is important to them (if they do, it's probably because they have a strong impulse to disregard that understanding and/or are gambling sums they don't care about...).
When it comes to bets on the outside world, crypto-gambling is arguably a lot worse than a high street bookmaker as it involves a de facto side bet on (i) the value of the crypto asset not declining during the bet duration and (ii) the oracle being reliable. It's not like you can't get odds or participate in more obscure bets or prediction markets using regular currency on p2p platforms or even with high street bookmakers either, it's just they're relatively niche interests...
Very well stated!
The main challenge, in my opinion, is volume.
The future of online betting is exchange marketplaces, where users/members can both back and lay event outcomes. This removes the reliance of a central player (bookmaker/sportsbook) to support the lay side of the market. Overlays are generally much smaller on exchanges.
However, to achieve this and also to support "trading" (multiple back and lay bets in the same market, based on in-play price movements), an exchange needs a high volume. Betfair is the best known exchange and has serious first mover advantage. I'm currently looking at the England vs India 3rd Test cricket Match Odds and over GBP44 million has been traded on that market alone. Liverpool vs Crystal Palace tonight, GBP700k and there's still four hours until kickoff. The 15.05 Thirsk 7f horse race, currently in-play and GBP650k volume.
All of Betfair's competitors to date have really struggled with this aspect. Betdaq, Smarkets, Matchbook, no matter how good their service offering or how low their commission, haven't been able to attract the same level of betting volume and are thus not as attractive as Betfair. A little bit chicken and egg scenario to be sure.
Anyway, in my view the biggest hurdle Augur will need to clear is that of market volume.
I know - just another armchair hack, but I've been running a company that builds/runs prediction markets inside corporations for the past 12 years...
You have better odds in Vegas.
In a very narrowly defined space, it is something that works, yes, but as always with tech in this space "there be dragons".
As a side note, I stg that every "new thing" built on ethereum is just a chain of underpants gnome logic. Except the "???" is something you can drive a star system through.
When something is currently operating, just saying it can't work because of "technical obstacles" is bound to seem like a drive-by comment. The same with saying "there be dragons."
I'm genuinely interested--so can we enumerate some dragons? Can you elaborate?
I'm interested in when the patents were issued and the methods they cover.
The only problem I could really see being solved by Augur is that maybe it can work around regulations that prohibit many forms of "bets". But the article also says that Augur is facing legal challenges already, and it will be determined in September whether they can continue.
Its decentralised, "illegal" nature reminds me of BitTorrent. Sure, there is money to be made. But the real change will come when companies akin to Netflix figure out how to do it centrally and legally.
Conspicuously missing from this article: Augur's business model. They presumably get a house take?
Who got the $5 million?
The foundation to fund development (which they kept in Ether so is much more valuable than $5million when the sale happened).
He's right, it's a protocol. There is no method for them to take a cut. The protocol gives the fees to the REP holders who report the outcome by staking their REP tokens.
Tl;dr is that 80% went to public, 16% to founders and 4% to foundation.
So, no, I don't think they have a house take? However, the individual markets are each made by someone, and I believe that these "market makers" are financially rewarded through I guess a sort of a house take thing?
Fees on the Augur protocol go directly to the market creator and REP holders who report and dispute outcomes. The Forecast Foundation does not recieve any fees from actions, trades, markets or use on the Augur protocol.
I guess this has to do with them being a decentralized marketplace, which as the article discusses does have some cool perks.
In the USA, PredictIt.org is a site that is also aimed at prediction, but they take a 10% fee on profit, and then a 5% fee on withdrawal. Seemingly a lot more volume on their markets than Augur at the moment, with some of their markets having hundreds of thousands of shares traded, and thousands of comments.
Edit: After I posted I now see that Gibsons77 gave a better and more concise answer to the question
I don't know that there is much value to running it on the blockchain though.