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I’m interested in the liquidity constraints theory - Betfair has ~$1bn matched for the most recent election. At present there is ~$700k bid and offered at the

• benkuhn 6y ago
  Sorry, that was imprecise. My impression is that, at least on some prediction markets, transaction fees (and maybe also inflation?) make it low-return to buy high-probability contracts. I don't bet on prediction markets myself so I may be wrong about this though!
  • amznthrwaway 6y ago
    You're correct; there are often fees to deposit or withdrawal, as well as fees on profits. Additionally, consistent winners may face other fees (e.g. Betfair's "premium charge", which will hit long-term consistent winners with a 20% fee on overall profits) Combine those fees with the need to tie up the money until a decision is made, and it makes it hard to make profit from high probability bets. (or from any bet where the line is reasonably near the true odds).
  • b0b10101 6y ago
    yep, predictit takes a 5% fee on profit + 10% on withdrawals
    • bhitov 6y ago
      Other way around. 10% profit 5% withdrawal.
  • nstj 6y ago
    How would the fees make it any less profitable for high probability contracts vs low probability contracts? And could you expand on the inflation theory? Appreciate the insight!
    • Retric 6y ago
      Opportunity costs on long term high probability events eats up significant portions of the value of winning. Add withdrawal fees and you could easily lose money while making an accurate prediction.
      • nstj 6y ago
        Sure but cost of capital != inflation. And I understand the impact of fees but I’m wondering how they could influence high likelihood bet profitability more than low likelihood bet profitability?
        • Retric 6y ago
          Let’s suppose your paying a 10% withdrawal fee on winnings and 0% fee on principle. If your payoff is 10% and you're also losing out on 2% to opportunity cost. Net winning is (10% * 0.9 - 2%) = 7% but your withdrawal fee is effectively reducing your winnings from 8% or 7% a loss of 12.5%. On the other if the bet paid 100% of your money you would net (100% * 0.9 - 2%) = 88% and your fee dropped you from 98% to 88% a net loss of 10.2%. PS: These numbers get much worse if the withdrawal fee includes the principle. Then you would be have a net loss of (110% * 0.9 - 2%) = 3% on the first bet and a net gain of 78% on the second.
          • nstj 6y ago
            I don’t know how you got those numbers. In all the betting markets I participate in, the fees are charged on profit - so it isn’t related to how much of my money I bet, it’s just related to profit. Win a 3:1 bet with 10% fees? You’re losing 10% of $3 if you bet $1 (ie: 30c). Win a 30:1 bet with 10% fees? You’re losing 10% of $30 if you bet $1 (ie: $3). I’m still trying to work out how the fees are “higher” for high probability bets - they’re always the same rate.
            • Retric 6y ago
              Edit: Numbers where picked for clarity, the principle is the same with a 0.1% fee or an 80% fee. To simplify not using money for some time period has an opportunity cost. Either because you could have paid off a loan sooner, or bought a T bill, or whatever. If the bet takes a year then at the end of that year you could either have (principle + opportunity) cost if you don’t make the bet, (principle + winnings) if you make the bet and win, or nothing if you lost. Therefore the cost of making the bet in 2010 that paid out in 2020 isn’t the money you put upfront, but the money you could have had in 2020 without making the bet. However, the winnings are calculated based on your initial payment not the payment + opportunity cost. So let’s look at a bet that pays 1$ after fees and costs you 1$ worth of opportunity costs. In such a bet the fees reduce your winnings to zero because you could have the same amount of money without the risk of the bet.