5 ms·

Prediction markets can tell the future. Why is the US so afraid of them?

34 points by pbyte13 3y ago

Swansea1 3y ago
[dead]
jawns 3y ago
Prediction markets and bookmakers really strongly expected a Clinton win in 2016. Irish bookies were so sure Trump would lose that one firm began paying out to those who bet Clinton even before the election. And we all know how that turned out. Nov. 7, 2016: "Hillary Clinton’s odds of winning the presidency rose from 78% last week to 91% Monday before Election Day, according to CNN’s Political Prediction Market." https://www.cnn.com/2016/11/07/politics/political-prediction-market-hillary-clinton-donald-trump/index.html https://www.cnn.com/2016/11/07/politics/political-prediction...
- johnfn 3y ago
  You can go look at the old Predictit market if you like - it's still around[1]. You can also check election betting odds[2]. Clinton hovered around 60-80 in the week or two before the election. Even if it were 90%, I'm not sure that's an indictment of prediction markets. A probability of 90% means that 10% of the time, the other thing happens. It's a bit like saying "wow, it's cold today; I guess global warming isn't real." You'd want to to an analysis across many many prediction markets in order to see if they're generally accurate. That already exists, it's here if you'd like to look at it[3]. [1]: https://www.predictit.org/markets/detail/1234/Who-will-win-the-2016-US-presidential-election https://www.predictit.org/markets/detail/1234/Who-will-win-t... [2]: https://electionbettingodds.com/WIN_chart_maxim_lott_john_stossel.html https://electionbettingodds.com/WIN_chart_maxim_lott_john_st... [3]: https://www.metaculus.com/questions/track-record/ https://www.metaculus.com/questions/track-record/
  - aidenn0 3y ago
    #3 makes it look like things predicted as "very likely not" (10-20%) and "very likely so" (80-90%) tend to be biased towards the contrarian view. Does Metaculus have limits that make it unprofitable to make bets things that would push them outside the window? Anecdotally I've seen quotes from prediction marktets that show a surprisingly high chance for things that are incredibly improbable (to the point that I would call them "impossible" in casual conversation).
    - johnfn 3y ago
      I've been snagged by a few markets that were in the high 90s or low 10s and looked like free money, but ended up resolving the other way. It's usually either 1) there was some subtlety in how the market was written that causes it to resolve unexpectedly or 2) a true inversion - it just seems like human nature to under-predict how often they actually happen.
      - aidenn0 3y ago
        In this case the markets are overpredicting inversions; there's at most a very small difference between how often markets predicted at 5% and markets predicted at 20% resolve as "no." Same for the 75%-95% range.
  - not2b 3y ago
    We have no way of exploring the multiverse or running the same election more than once, so there isn't any evidence that the payout from a prediction market matches the probability of something happening. It's just collecting the predictions of people who are willing to bet money, weighted by how much they spend, and calling that the prediction. I don't think rich people are necessarily better than not-so-rich people in predicting something not related to their expertise, but prediction markets are weighted according to how much was bet.
    - johnfn 3y ago
      Is this a response to the metaculus track record, which is an aggregate of the accurate of all predictions ever made on the platform, and shows that predictions fall close to accurate probabilities? Which part of the track record do you find fault with?
      - not2b 3y ago
        I looked at it. Their FAQ says that they aren't a prediction market, and they operate differently. People aren't placing bets, so it isn't weighted in favor of the wealthy. They weight people based on past prediction success. So, maybe their approach works better. See https://www.metaculus.com/help/faq/ https://www.metaculus.com/help/faq/
- blibble 3y ago
  brexit was similar I remember several people IRL saying "well the market thinks it's a 90% chance of remain so I'm not worried"
  - johnfn 3y ago
    Same response I gave the other guy - you can go look up the market here rather than conjecturing [1]. It was about 25% the day before. In any case, it seems very silly to discount prediction markets because the probability didn't work the way you expected it to in a single event. The whole point of probability is that it's probabilistic! [1]: https://www.predictit.org/markets/detail/1413/Will-the-UK-vote-to-leave-the-EU-by-year-end-2016 https://www.predictit.org/markets/detail/1413/Will-the-UK-vo...
    - blibble 3y ago
      > In any case, it seems very silly to discount prediction markets because the probability didn't work the way you expected it to in a single event. prediction markets participants are idiots with no underlying knowledge betting according to their bias they are no different to the "markets" created at the dog track
      - johnfn 3y ago
        If that were true then the results of prediction markets wouldn't closely track the actual results that happen, as the link I provided shows that they do. Also, you could be making tons of money right now! How's that going?
        blibble 3y ago
        > Also, you could be making tons of money right now! How's that going? as someone who has spent most of their career working on trading floors watching professional traders do their jobs I'm perfectly happy staying the hell away from prediction "markets", thank you very much
- flashback2199 3y ago
  This is true and is a great counterexample. Not too sure why it's being downvoted..
sonabinu 3y ago
Looks like an interesting article but behind a paywall
- zarzavat 3y ago
  https://archive.is/0Amrm https://archive.is/0Amrm
- deleted 3y ago
  [deleted]
erulabs 3y ago
If prediction markets could tell the future one would imagine the first person to harness them would now be the most wealthy and powerful person to have ever lived. So, you know, DOUBT.
- gruez 3y ago
  >If prediction markets could tell the future one would imagine the first person to harness them would now be the most wealthy and powerful person to have ever lived. 1. It's unclear how you or any person in particular would be "the most wealthy and powerful person to have ever lived", because other people would also be able to exploit it 2. Many predictions are hard to act upon, even if you know they're accurate. https://www.economist.com/finance-and-economics/2023/10/30/what-a-third-world-war-would-mean-for-investors https://www.economist.com/finance-and-economics/2023/10/30/w...
- verteu 3y ago
  The stock market is quite similar to a prediction market (on the future valuation of companies), and it's made plenty of people wealthy and powerful.
- qznc 3y ago
  Prediction markets are not perfect but they are better than the usual alternatives like asking experts.
kibwen 3y ago
The problem with predictions markets is that they incentivize participants to distort the market in order to make their prediction come true (and thus receive a payout). It quickly stops being a place to gauge the likelihood of an event, and turns into a roundabout contract bidding mechanism, the most famous example being "the likelihood that so-and-so famous politician will be dead by next year" is just an anonymized assassination contract. There's a reason that insider trading is illegal; prediction markets are inordinately susceptible to Goodhart's Law.
- johnfn 3y ago
  In theory the same thing is true with horse race betting; you can just assassinate the horse. Or the jockey. Or if you want to be more subtle about it, just slip something into the horse feed. But this doesn't really happen in practice.
  - deleted 3y ago
    [deleted]
  - kibwen 3y ago
    Match fixing happens regularly, so regularly that we have the term "match fixing" with a Wikipedia article dedicated to it. The presumption that match fixing doesn't happen in practice is unfounded. Here, from two months ago: "Over 180 professional tennis players participated in a global match-fixing ring" https://www.npr.org/2023/09/10/1198675541/over-180-professional-tennis-players-participated-in-a-global-match-fixing-ring https://www.npr.org/2023/09/10/1198675541/over-180-professio...
    - johnfn 3y ago
      OK, fair; a stronger argument is "it doesn't happen enough that we need to shut down horse racing". Or tennis betting, in your case.
      - arcticbull 3y ago
        It's a question of scale. A few horses aren't a big deal, and both sides (the horse racing, and the bet) are heavily constrained in scope. Both sides become far less constrained with prediction markets. Maybe if we were objective, horse betting should be shut down -- but we kinda don't care.
throwanem 3y ago
There's an old word for the operator of a prediction market: "bookie".
monero-xmr 3y ago
Despite the pearl clutching on HN about assassinations (killing a CEO after shorting stock is a very similar profit outcome, yet no one does this because that’s totally insane), prediction markets have been fairly popular for a few years as blockchain tech has risen. And the sky has not fallen! One example is Polymarket: https://polymarket.com/ https://polymarket.com/
mise_en_place 3y ago
They work a lot like binary options, which can fool a lot of unsophisticated investors. The line is a lot thinner between prediction markets and gambling.
- gruez 3y ago
  Binary options seem pretty straightforward to me. How are people being "fooled"?
c0m 3y ago
I would like to test whether prediction markets are worse than they were during zero-interest land. The incentive to create sophisticated models to get low percentage points of edge is much lower today than it was before. Why risk time and effort trying to predict the 2024 election for a few pp of edge when you can… just buy a 1y tbill instead? Sure there are probably better ways to express an opinion on these types of things too. Options that favour a team red or team blue win come to mind, but no matter what you’re still competing with 5% yield. I think this is solvable by having some kind of betting token that itself accrues interest over time to reduce the opportunity cost but if regulators already don’t like prediction markets boy they especially wouldn’t like that.
- qznc 3y ago
  This is indeed a problem for long-term markets but long-term is more about 10 years and longer here. Something like "Will China invade Taiwan before 2040?" is a long-term example. Prediction markets are nearly 50-50 for democrat vs republican president currently. That is a 100% yield if you are correct. It isn't about the yield. It is about much more accurate you are. If your oracle gives you 60-40, you will still lose lots of bets but you will easily beat the 5% yield of treasure bills.
mikrl 3y ago
>they incentivize participants to distort the market in order to make their prediction come true (and thus receive a payout) Isn’t that true of any goal directed activity, or desire?
somat 3y ago
Whats the difference between a prediction market and a futures market? Which sounds like a joke. But I am unable to think of one right now. Actually... how is this different from the stock market. You buy and sell based on how the market is predicted to go..
- gruez 3y ago
  The difference is that you can bet on real life events (or anything, really) rather than being limited to financial instruments.
- cman1444 3y ago
  I'm no expert, but I assume the difference is the underlying asset that you're betting on. Stock vs commodity price at given time vs "event coming to pass or not".
m3kw9 3y ago
Prediction markets incentivize people with insider info to participate
a257 3y ago
While the game-ability of prediction markets is a major concern, I believe that the potential of prediction markets to further exacerbate inequalities may be a greater threat. It is important to keep in mind that while markets optimize for total value, it doesn't guarantee that it will optimize for things we as individuals want. Free markets tend to lead to a positive feedback loop. Someone who has a lot of money will be able to predict the market better than someone who has less. Their advantage generates more wealth which helps them to predict the market better. Wealth generates more wealth. In theory, this is offset by the notion that the market is not a zero sum game. The person may be generating new, previously unavailable, wealth. But while stock performance is tied to the success of a company (which can generate new wealth), prediction markets are tied to transient questions (where intrinsic value diminishes the closer you get to expiry). In this sense, how "predictions" might generate "new value" is unclear.

34 points by pbyte13 3y ago

[dead]

Prediction markets and bookmakers really strongly expected a Clinton win in 2016. Irish bookies were so sure Trump would lose that one firm began paying out to those who bet Clinton even before the election. And we all know how that turned out. Nov. 7, 2016: "Hillary Clinton’s odds of winning the presidency rose from 78% last week to 91% Monday before Election Day, according to CNN’s Political Prediction Market." https://www.cnn.com/2016/11/07/politics/political-prediction-market-hillary-clinton-donald-trump/index.html https://www.cnn.com/2016/11/07/politics/political-prediction...

johnfn 3y ago
You can go look at the old Predictit market if you like - it's still around[1]. You can also check election betting odds[2]. Clinton hovered around 60-80 in the week or two before the election. Even if it were 90%, I'm not sure that's an indictment of prediction markets. A probability of 90% means that 10% of the time, the other thing happens. It's a bit like saying "wow, it's cold today; I guess global warming isn't real." You'd want to to an analysis across many many prediction markets in order to see if they're generally accurate. That already exists, it's here if you'd like to look at it[3]. [1]: https://www.predictit.org/markets/detail/1234/Who-will-win-the-2016-US-presidential-election https://www.predictit.org/markets/detail/1234/Who-will-win-t... [2]: https://electionbettingodds.com/WIN_chart_maxim_lott_john_stossel.html https://electionbettingodds.com/WIN_chart_maxim_lott_john_st... [3]: https://www.metaculus.com/questions/track-record/ https://www.metaculus.com/questions/track-record/
- aidenn0 3y ago
  #3 makes it look like things predicted as "very likely not" (10-20%) and "very likely so" (80-90%) tend to be biased towards the contrarian view. Does Metaculus have limits that make it unprofitable to make bets things that would push them outside the window? Anecdotally I've seen quotes from prediction marktets that show a surprisingly high chance for things that are incredibly improbable (to the point that I would call them "impossible" in casual conversation).
  - johnfn 3y ago
    I've been snagged by a few markets that were in the high 90s or low 10s and looked like free money, but ended up resolving the other way. It's usually either 1) there was some subtlety in how the market was written that causes it to resolve unexpectedly or 2) a true inversion - it just seems like human nature to under-predict how often they actually happen.
    - aidenn0 3y ago
      In this case the markets are overpredicting inversions; there's at most a very small difference between how often markets predicted at 5% and markets predicted at 20% resolve as "no." Same for the 75%-95% range.
- not2b 3y ago
  We have no way of exploring the multiverse or running the same election more than once, so there isn't any evidence that the payout from a prediction market matches the probability of something happening. It's just collecting the predictions of people who are willing to bet money, weighted by how much they spend, and calling that the prediction. I don't think rich people are necessarily better than not-so-rich people in predicting something not related to their expertise, but prediction markets are weighted according to how much was bet.
  - johnfn 3y ago
    Is this a response to the metaculus track record, which is an aggregate of the accurate of all predictions ever made on the platform, and shows that predictions fall close to accurate probabilities? Which part of the track record do you find fault with?
    - not2b 3y ago
      I looked at it. Their FAQ says that they aren't a prediction market, and they operate differently. People aren't placing bets, so it isn't weighted in favor of the wealthy. They weight people based on past prediction success. So, maybe their approach works better. See https://www.metaculus.com/help/faq/ https://www.metaculus.com/help/faq/
blibble 3y ago
brexit was similar I remember several people IRL saying "well the market thinks it's a 90% chance of remain so I'm not worried"
- johnfn 3y ago
  Same response I gave the other guy - you can go look up the market here rather than conjecturing [1]. It was about 25% the day before. In any case, it seems very silly to discount prediction markets because the probability didn't work the way you expected it to in a single event. The whole point of probability is that it's probabilistic! [1]: https://www.predictit.org/markets/detail/1413/Will-the-UK-vote-to-leave-the-EU-by-year-end-2016 https://www.predictit.org/markets/detail/1413/Will-the-UK-vo...
  - blibble 3y ago
    > In any case, it seems very silly to discount prediction markets because the probability didn't work the way you expected it to in a single event. prediction markets participants are idiots with no underlying knowledge betting according to their bias they are no different to the "markets" created at the dog track
    - johnfn 3y ago
      If that were true then the results of prediction markets wouldn't closely track the actual results that happen, as the link I provided shows that they do. Also, you could be making tons of money right now! How's that going?
      - blibble 3y ago
        > Also, you could be making tons of money right now! How's that going? as someone who has spent most of their career working on trading floors watching professional traders do their jobs I'm perfectly happy staying the hell away from prediction "markets", thank you very much
flashback2199 3y ago
This is true and is a great counterexample. Not too sure why it's being downvoted..

sonabinu 3y ago

Looks like an interesting article but behind a paywall

zarzavat 3y ago
https://archive.is/0Amrm https://archive.is/0Amrm
deleted 3y ago
[deleted]

erulabs 3y ago

If prediction markets could tell the future one would imagine the first person to harness them would now be the most wealthy and powerful person to have ever lived. So, you know, DOUBT.

gruez 3y ago
>If prediction markets could tell the future one would imagine the first person to harness them would now be the most wealthy and powerful person to have ever lived. 1. It's unclear how you or any person in particular would be "the most wealthy and powerful person to have ever lived", because other people would also be able to exploit it 2. Many predictions are hard to act upon, even if you know they're accurate. https://www.economist.com/finance-and-economics/2023/10/30/what-a-third-world-war-would-mean-for-investors https://www.economist.com/finance-and-economics/2023/10/30/w...
verteu 3y ago
The stock market is quite similar to a prediction market (on the future valuation of companies), and it's made plenty of people wealthy and powerful.
qznc 3y ago
Prediction markets are not perfect but they are better than the usual alternatives like asking experts.

kibwen 3y ago

The problem with predictions markets is that they incentivize participants to distort the market in order to make their prediction come true (and thus receive a payout). It quickly stops being a place to gauge the likelihood of an event, and turns into a roundabout contract bidding mechanism, the most famous example being "the likelihood that so-and-so famous politician will be dead by next year" is just an anonymized assassination contract. There's a reason that insider trading is illegal; prediction markets are inordinately susceptible to Goodhart's Law.

johnfn 3y ago
In theory the same thing is true with horse race betting; you can just assassinate the horse. Or the jockey. Or if you want to be more subtle about it, just slip something into the horse feed. But this doesn't really happen in practice.
- deleted 3y ago
  [deleted]
- kibwen 3y ago
  Match fixing happens regularly, so regularly that we have the term "match fixing" with a Wikipedia article dedicated to it. The presumption that match fixing doesn't happen in practice is unfounded. Here, from two months ago: "Over 180 professional tennis players participated in a global match-fixing ring" https://www.npr.org/2023/09/10/1198675541/over-180-professional-tennis-players-participated-in-a-global-match-fixing-ring https://www.npr.org/2023/09/10/1198675541/over-180-professio...
  - johnfn 3y ago
    OK, fair; a stronger argument is "it doesn't happen enough that we need to shut down horse racing". Or tennis betting, in your case.
    - arcticbull 3y ago
      It's a question of scale. A few horses aren't a big deal, and both sides (the horse racing, and the bet) are heavily constrained in scope. Both sides become far less constrained with prediction markets. Maybe if we were objective, horse betting should be shut down -- but we kinda don't care.

throwanem 3y ago

There's an old word for the operator of a prediction market: "bookie".

monero-xmr 3y ago

Despite the pearl clutching on HN about assassinations (killing a CEO after shorting stock is a very similar profit outcome, yet no one does this because that’s totally insane), prediction markets have been fairly popular for a few years as blockchain tech has risen. And the sky has not fallen! One example is Polymarket: https://polymarket.com/ https://polymarket.com/

mise_en_place 3y ago

They work a lot like binary options, which can fool a lot of unsophisticated investors. The line is a lot thinner between prediction markets and gambling.

gruez 3y ago
Binary options seem pretty straightforward to me. How are people being "fooled"?

c0m 3y ago

I would like to test whether prediction markets are worse than they were during zero-interest land. The incentive to create sophisticated models to get low percentage points of edge is much lower today than it was before. Why risk time and effort trying to predict the 2024 election for a few pp of edge when you can… just buy a 1y tbill instead? Sure there are probably better ways to express an opinion on these types of things too. Options that favour a team red or team blue win come to mind, but no matter what you’re still competing with 5% yield. I think this is solvable by having some kind of betting token that itself accrues interest over time to reduce the opportunity cost but if regulators already don’t like prediction markets boy they especially wouldn’t like that.

qznc 3y ago
This is indeed a problem for long-term markets but long-term is more about 10 years and longer here. Something like "Will China invade Taiwan before 2040?" is a long-term example. Prediction markets are nearly 50-50 for democrat vs republican president currently. That is a 100% yield if you are correct. It isn't about the yield. It is about much more accurate you are. If your oracle gives you 60-40, you will still lose lots of bets but you will easily beat the 5% yield of treasure bills.

mikrl 3y ago

>they incentivize participants to distort the market in order to make their prediction come true (and thus receive a payout) Isn’t that true of any goal directed activity, or desire?

somat 3y ago

Whats the difference between a prediction market and a futures market? Which sounds like a joke. But I am unable to think of one right now. Actually... how is this different from the stock market. You buy and sell based on how the market is predicted to go..

gruez 3y ago
The difference is that you can bet on real life events (or anything, really) rather than being limited to financial instruments.
cman1444 3y ago
I'm no expert, but I assume the difference is the underlying asset that you're betting on. Stock vs commodity price at given time vs "event coming to pass or not".

m3kw9 3y ago

Prediction markets incentivize people with insider info to participate

a257 3y ago

While the game-ability of prediction markets is a major concern, I believe that the potential of prediction markets to further exacerbate inequalities may be a greater threat. It is important to keep in mind that while markets optimize for total value, it doesn't guarantee that it will optimize for things we as individuals want. Free markets tend to lead to a positive feedback loop. Someone who has a lot of money will be able to predict the market better than someone who has less. Their advantage generates more wealth which helps them to predict the market better. Wealth generates more wealth. In theory, this is offset by the notion that the market is not a zero sum game. The person may be generating new, previously unavailable, wealth. But while stock performance is tied to the success of a company (which can generate new wealth), prediction markets are tied to transient questions (where intrinsic value diminishes the closer you get to expiry). In this sense, how "predictions" might generate "new value" is unclear.