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I was hoping the article would reflect on the problems with predictions markets, but it's just a dry history. Crucially, "predictions markets" do not and canno

by kibwen 2y ago

I was hoping the article would reflect on the problems with predictions markets, but it's just a dry history. Crucially, "predictions markets" do not and cannot exist in any real sense. A pure predictions market would be completely isolated, causality-wise, from the event they are trying to predict. But the two are not and cannot be isolated, except for some degenerate cases like trying to guess the output of a true random number generator (and even then I'm not so sure sufficiently motivated people wouldn't try to game the system anyway). This is why we have problems with our current predictions markets, e.g. the stock market (insider trading, etc.) and sports betting (match-fixing, etc.). Every prediction with a stake is an incentive to alter the outcome of an event. Once the weight of the stake outweighs the resources being used to ensure the impartiality of the outcome, the wheels fully come off the cart and the prediction stops being about the underlying event and starts self-referentially predicting the impact of the prediction itself. The snake eats its own tail and the market becomes useless. You cannot scale up a predictions market without this eventually coming to pass. See also the famous example of how a predictions market for when public figures will die is just an assassination market with extra steps.

cj 2y ago
Prediction markets (like the trump vs harris bet on Robinhood) can also be used as a hedge. E.g. if before the election you think that a certain candidate winning would cause the markets to react in a certain direction, you could "bet" on the other candidate so that if your portfolio value goes down, you earn the proceeds from the bet to recoup some of your portfolio losses. Or if the "good for stock market" candidate wins, you loose the money you bet but the gains in your portfolio balances it out. In that case, you're not really betting on who you think will win. You're just betting as a hedge just in case that person wins.
- JumpCrisscross 2y ago
  [flagged]
  - Jerrrrrrry 2y ago
    the world can be idiotic far longer than...
  - dgfitz 2y ago
    This is an idiots take.
    - Jerrrrrrry 2y ago
      It's a nuanced take, re-parse. It is literally an "idiot" put, betting on idiocy.
  - failbuffer 2y ago
    This is the Hacker News community. Let's be constructive and civil. Your comment would have more interesting and relevant if you had explained why this trading strategy is a bad idea instead of just labeling it as "idiotic".
    - Dalewyn 2y ago
      I'll bite, I guess: * In deferrence to Boglehead philosophy, hedging bets is a fool's errand because the idea is you lose your money the more you touch it. Make a plan, invest, and then hold hold hold staying the course come hell or high water. * If you truly want to reduce or eliminate risk, the best way is to simply cash out. A $1 bill will always be a $1 bill with absolute certainty.
      - sodality2 2y ago
        As a boglehead... that's just not how it works in the real world. Some people would treat the loss of $X worse than the gain of $X is good. Thus, they don't have linear value for money (no one really does... if you lose 90% of your bank account, you still have dinner tonight; if you lose all of it, you might not). Some people want to come out neutral or lose a guaranteed small amount, rather than the chance to lose or gain the same amount. I'd pay $5 to avoid having to flip a $10k +/- coin. Thus, if I knew I would lose $10k if X got elected, I could place a $10k bet for Y to win.
- kibwen 2y ago
  > You're just betting as a hedge just in case that person wins. But this itself is a form of market distortion. It calls to question what, precisely, people think the market is supposed to be measuring, both in theory and in practice.
  - cj 2y ago
    Exactly. Similarly, companies impacted by weather have access to trade "weather futures". If it's an extremely dry year, you profit from the weather futures instead of your crops (and vice versa). Buying weather futures isn't necessarily a prediction of what you think the weather will be.
    - joshuamorton 2y ago
      But, it is a function of what you believe the future will be (and your risk tolerance). If you have a higher risk tolerance, you will buy fewer futures. If you believe the next year will be dryer than normal, you will buy more futures than normal. If you believe your crop is likely to be better/more reliable than normal, you will buy fewer futures.
      - dmurray 2y ago
        > If you believe the next year will be dryer than normal, you will buy more futures than normal. The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. The same way you shouldn't buy more flood insurance if you think the next year will be exceptionally wet. You can't really predict that, after all. You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.
        joshuamorton 2y ago
        > The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. And I'll reiterate, this is a function of your risk-aversion/efficiency. One would expect, for example, climate change to increase the price of weather futures as extreme/problematic weather events become more likely. It's often difficult to see the impact of these changes on the scale of a single farmer, but in aggregate lots of farmers do a market make. > You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup. And the insurance companies have a small army of actuaries who make sure that the prices they provide take into account conditions like the relevant risk factors of where your home is. This is instead of a betting market style concept, where you could instead imagine every individual actuary as a potential insurer.
- s1artibartfast 2y ago
  With this last election, there were also some big differences across markets, which presents the opportunity for not only hedging, but constructing a win-win set of bets.
  - lupire 2y ago
    Not really. Transaction costs / vig (commonly 5%) and counterparty risk eat up theoretical arbitrage profits. The main arbitrage opportunity was in finding ways to place illega bets in the bettor's jurisdiction.
    - s1artibartfast 2y ago
      I read that some markets had >10% differences and from what I can tell, polymarket transaction costs are 2% of profit. That said, Im not sure that all of the listed markets had open financial access, so it stands that there were real reasons the differences were sustained and people didn't do exactly what I said.
- gruez 2y ago
  >In that case, you're not really betting on who you think will win. You're just betting as a hedge just in case that person wins. Some people did exactly this back in 2016, and just ended up feeling bad, because they were profiting off a "bad" (in their eyes) event.
- deleted 2y ago
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deleted 2y ago
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ddp26 2y ago
(Author here.) I agree with this critique in theory, but not in practice. The stakes don't need to be high to encourage strong participation. Corporate prediction markets have already scaled quite far, and those who have studied them don't find evidence of manipulation. Can't let perfect be the enemy of the good! If you want a fuller critique of prediction markets in the corporate setting, see the Dec 2021 article linked near the end [1]. [1] https://forum.effectivealtruism.org/posts/dQhjwHA7LhfE8YpYF/prediction-markets-in-the-corporate-setting https://forum.effectivealtruism.org/posts/dQhjwHA7LhfE8YpYF/...
- joe_the_user 2y ago
  The stakes don't need to be high to encourage strong participation. OK but strong participation isn't necessarily a positive for the accuracy of a market. The problem is the prediction market with lots of participants can be just outlet for partisans to put forward their opinions. There's a tax on wrong opinions but someone is spending a bucks, the markets won't be a powerful force for changing those opinions. What you want for a prediction market is for the major participants to actively researching the problems - expend money and effort to have a well founded reason for their positions. Markets for random real-world events have the problem that many events don't occur often to weed out arbitrary biases and there may not be any easy or cost effect way to attain a well-founded opinion on the subject.
- vlovich123 2y ago
  From your own article: > A senior executive saw Prophit give a very low probability that the company would complete the hire of a new senior executive on time (filling the position had been a quarterly objective for the past six quarters). “The betting on this goal was extremely harsh. I am shocked and outraged by the lack of brown-nosing at this company,” the executive said to laughter in a company-wide meeting. But the market was the nudge the execs needed. They subsequently “made some hard decisions” to complete the hire on time. Indeed. The whole point of the prediction markets espoused is to alter the decisions being made. That means the prediction itself can have an impact on the outcome intentionally or otherwise.
  - 2y ago
JumpCrisscross 2y ago
> the two are not and cannot be isolated, except for some degenerate cases like trying to guess the output of a true random number generator You’re describing endogeneity. It’s unlikely prediction markets affect natural disaster odds.
- kibwen 2y ago
  > It’s unlikely prediction markets affect natural disaster odds. They don't need to. Predictions markets for natural disasters exist, we call them insurance companies, and the concept of moral hazard when it comes to insurance is a well-studied topic: https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard
  - JumpCrisscross 2y ago
    One, insurance happens at insurance companies and in markets. Two, there are prediction markets for natural disasters. Three, moral hazard doesn’t mean insurance makes natural disasters more likely.
    - kibwen 2y ago
      The distinction matters both because the precise wording of specific contracts will cause distinctions that were not adequately considered by certain participants, and also because of who enforces the contract at a human level. Who determines what does and does not qualify as a natural disaster? If that entity has a stake in one outcome, or is influenced by an entity with a stake in one outcome, that changes the outcome. Both of these are seen in insurance claims, where homeowners find out that rising rainwater does not actually count as a "flood", and where agents of the insurance company are financially incentivized not to pay out at all if they can help it. These factors do not go away just because you take away the insurance company, you've simply diffused them.
strken 2y ago
What do "any real sense" and "scale" mean here? I was watching the Betfair odds during the US election, and that market alone had about $500 million dollars of bets pass through it. Is that not real? Is half a billion dollars not sufficiently scaled up?
- mrbombastic 2y ago
  They mean that once they reach a certain scale they cease to be predictors and start affecting outcomes, not that it is impossible to allow people to bet on things indefinitely.
mfro 2y ago
You make a very good argument against prediction markets in which the stake has actual material value, but what about markets where the only stake is your reputation? My understanding of the Google platforms is that there were prize rewards for top predictors but largely the rewards were social, which, to me, implies they were not taken particularly seriously. An ideal platform might be one where there is no material incentive but users are instead interested in genuine hypothesizing about future events. Obviously there must be a genuine stake involved, but as we see with Manifold this can be done with 'play money'. Would be very interested to see further discussion about this.
- kibwen 2y ago
  The two problems I identify with this are 1) it underestimates the distorting effect of social rewards (see also karma farmers and serial confabulators on Reddit) and 2) it overlooks how verifiable reputation can be turned into profit by e.g. account-selling (once again, see Reddit).
- eitally 2y ago
  Very true. At Google it was treated much like Memegen where top bettors -- like top memers -- were rewarded with clout & notoriety, but it basically stopped there. A lot of the wagers actually were on "inside baseball" topics (will x/y/z be deprecated by a//b/c date, will perf metrics align with targets, etc). There are a few handfuls of folks who are really into it, but the vast majority of use is casual.
s1artibartfast 2y ago
lack of isolation isnt necessarily a insurmountable problem, as the market can still forecast, even if it is sometimes a self fulfilling prophecy. Similarly, this distortion does not necessarily overshadow the utility - e.g. the stock market may have insider trading, but is still an incredibly useful financial tool. They key thing to remember is that these markets can have utility beyond zero-sum betting aspect. For example, the stock market isnt just gamblers betting against each other, but is also a tool for auctioning corporate ownership and raising corporate funds.
jjmarr 2y ago
> This is why we have problems with our current predictions markets, e.g. the stock market (insider trading, etc.) A unit of stock represents a legal claim on a company's assets even in the absence of a market for that stock. In many situations, we do want people to influence the value of their stock. Any company that grants stock is doing so because they expect employees to work harder. There are many cases in which employees with stock grants might make short-sighted decisions for quick profits, but on the whole stock grants make employees into better workers. > A senior executive saw Prophit give a very low probability that the company would complete the hire of a new senior executive on time (filling the position had been a quarterly objective for the past six quarters). “The betting on this goal was extremely harsh. I am shocked and outraged by the lack of brown-nosing at this company,” the executive said to laughter in a company-wide meeting. But the market was the nudge the execs needed. They subsequently “made some hard decisions” to complete the hire on time. In this case, the predictions market would've been useless had the executive team not used it in their decision-making. A pure predictions market would be completely isolated from the event they're trying to predict. But I would say that's not an ideal predictions market.
- adamc 2y ago
  I think evidence would make this a stronger argument. Most of the people I've known with modest stock grants ignored them, or at least that's what they said -- kind of "maybe it will be worth something, but probably not". For really large grants, I'm sure it's different, but that is a far smaller number of employees.
  - leetcrew 2y ago
    stock grants don't solve the principal agent problem at a sufficiently large company. if I have an absolutely incredible year as an IC, I might increase my employers revenue by a few basis points. I have plenty of internal metrics to demonstrate my contribution, but nothing I do measurably affects the stock price.
- kibwen 2y ago
  The anecdote of the Google executive is a lovely example of why the market failed to work as a predictions market. If you had a stake on Google executives continuing to drag their feet on filling that position based on their past performance, and then they saw that prediction and were so incensed that they stopped dragging their feet, then you lost your stake!! The existence of the market changed the outcome; that's the whole point of the objection here! If you believe the purpose of such a market is to affect the real world in such a way, then sure, that's a reasonable stance... but that's not a market for making predictions, that's a distributed market for bidding on contracts.
ghaff 2y ago
I've spent some time looking at group decision making for specific situations and there are clearly some examples where they work very well--and I think you hit on one of the factors. The individual guesses don't affect the outcome and aren't being used to hedge anything. I think there are some other factors as well but I'm not sure I've ever seen a particularly persuasive framework for when prediction markets can work and when they don't.
currymj 2y ago
the same dynamic is true of insurance, credit default swaps, and lots of other financial products. this causes trouble from time to time but can be managed if the products serve a useful purpose.
duped 2y ago
How does a prediction market for say, hurricanes or earthquakes effect the outcome of those events?
- mejutoco 2y ago
  An event like a pandemic could be not classified as a pandemic by an authority to avoid paying some insurances compensation. It is not an earthquake, but a similar example, I believe.
- saithound 2y ago
  Prediction markets work via resolution criteria, and resolution is a human action. So the moment you operationalize any question, prediction markets can affect the outcome. To give an extreme example, when employees of the FHA bet on "Florida hurricane with 100+ casualties in 2024", they don't need to invent a weather control device to make that happen.
__MatrixMan__ 2y ago
I think there are cases where the outcome of the event can be bound to the prediction. Also we should be looking for cases where: > Every prediction with a stake is an incentive to alter the outcome of an event ...is a feature not a bug. For instance, imagine if PR's on core infrastructure (like xz-utils, for instance) were first reviewed by a set of trusted maintainers, and--supposing they pass that gate--were later put into a sort of limbo where people can bet on whether they'll be merged. The maintainers then make a policy around betting that the PR will be merged. They're in charge of whether it actually gets merged or not, so most of the time this is a pretty good bet and they just recycle that money by winning and then re-betting it on the next PR. Of course third parties can also bet in the same way--these would be stakeholders which are not maintainers, but who wish to "sweeten the pot" and encourage people to spend enough time with the pending code that they might find a reason to "bet against the house". No prior coordination between the maintainers and the stakeholders is necessary. Suppose I notice some malicious code in one of these commits which is in the betting phase. (Maybe I do my own testing on pre-release versions as a stakeholder, or maybe I'm a bug bounty hunter.) I can bet that the PR won't be merged. The monetary value of that bet makes it clear that even though I'm a stranger, I'm not a spammer. That "buys" me the attention of the maintainers, and if I'm right about the code being malicious, the maintainers will decide not to merge the commit: I'll have successfully altered the course of events (bad commit doesn't get merged) such that I get paid for having been right.
mrbombastic 2y ago
Great comment, I was fairly horrified to open Robinhood and be faced with a prediction market for the US election. I somehow missed completely that this has been legalized: https://amp.cnn.com/cnn/2024/10/02/business/appeals-court-allows-kalshi-election-betting https://amp.cnn.com/cnn/2024/10/02/business/appeals-court-al...
spencerchubb 2y ago
There are some ways to mitigate this. You can make the prize pool big enough that people will be motivated, but small enough that people won't try to sway the outcome. Also, prediction markets can be very useful for making predictions about competitors, because it would be rather difficult to influence what happens at a competing company.
- TheRealNGenius 2y ago
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defen 2y ago
> See also the famous example of how a predictions market for when public figures will die is just an assassination market with extra steps. Why not just write it so that non-natural causes of death don't pay out? More generally, make it so you can't wager on illegal events / outcomes, or ones where a crime materially affected the outcome. Anyway, if someone bets big on a public figure being assassinated, and then that public figure gets assassinated, it would seem like a good place to start investigating would be to look at the people who made a lot of money from that bet.
- lupire 2y ago
  "why not just" because it destroys the utility. There were 2-3 assassination attempts on Trump this year. It would be valuable to incentive people to share knowledge of assassination vulnerability, to guide security efforts. Banning that defeats the purpose.
skybrian 2y ago
You could as easily say that journalism is an attempt to influence events. And it is, in a way! I think most journalists would be happy to point to situations where their reporting was read by influential people and maybe even changed outcomes. Pulitzer prizes are awarded for that sort of thing. The question is whether this is improper influence? Is it too influential, for bad reasons? I think a more reasonable critique of prediction markets is that it's guesswork laundering. We are given a number, but we don't know why that number was chosen. How can we tell whether it's justified? When markets move, there is a whole industry of people coming up with explanations of why it might have happened - more guesswork! A lucky guess can be helpful if it can be verified, but knowledge should be about more than making guesses. Sharing evidence is important.
directevolve 2y ago
A market can still be well calibrated even if it has a strong causal influence on the topics it’s predicting.
aaron695 2y ago
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millipede 2y ago
In other words, money is speech.
throw_nbvc1234 2y ago
A "good" prediction market is when it functions as an accountability market. The insider trading problem isn't an issue if the outcome is for a greater good. The problem is that money is the easiest way to ensure anonymous predictors are serious about their predictions and getting richer is not a greater good. If you were to require politicians to participate in a reputational prediction market, the aligned incentives might make it a positive thing. You could let ordinary people piggy back participate too, and then use the results to filter through internet/media noise but that starts to smell too social score-ish.
ruuda 2y ago
My experience from predicting on Metaculus, and following this space for a few years, is that it's hard to operationalize the thing you want to predict precisely. Regularly, things go completely sideways in ways that the author did not foresee, and the market ends up hinging on some technicality, rather than the spirit of the question it tried to predict. Some examples: - A question about asset prices specifies FTX as resolution source, but then FTX stopped existing. - There was a question about wether submarine cables in the Red Sea would be destroyed by a hostile act before a certain date. The cables got damaged, but it seemed to be a (suspicious) accident, with very limited independent media coverage. - There is a question about wether YouTube would be blocked in a certain country before 2025. It got throttled, to the point where it is unusable in practice, but not technically blocked. - There is a question trying to forecast LLM progress. How to quantify that? It chose "What is the state of the art score on the Penn Treebank at a certain date?", which was a standard benchmark at the time. But as LLMs evolved, new benchmarks got developed, and although current LLMs probably score much better on the Penn Treebank than a few years ago, nobody reports Penn Treebank score any more. The question ended up being about the popularity of the benchmark rather than LLM progress.

by kibwen 2y ago

cj 2y ago

Prediction markets (like the trump vs harris bet on Robinhood) can also be used as a hedge. E.g. if before the election you think that a certain candidate winning would cause the markets to react in a certain direction, you could "bet" on the other candidate so that if your portfolio value goes down, you earn the proceeds from the bet to recoup some of your portfolio losses. Or if the "good for stock market" candidate wins, you loose the money you bet but the gains in your portfolio balances it out. In that case, you're not really betting on who you think will win. You're just betting as a hedge just in case that person wins.

JumpCrisscross 2y ago
[flagged]
- Jerrrrrrry 2y ago
  the world can be idiotic far longer than...
- dgfitz 2y ago
  This is an idiots take.
  - Jerrrrrrry 2y ago
    It's a nuanced take, re-parse. It is literally an "idiot" put, betting on idiocy.
- failbuffer 2y ago
  This is the Hacker News community. Let's be constructive and civil. Your comment would have more interesting and relevant if you had explained why this trading strategy is a bad idea instead of just labeling it as "idiotic".
  - Dalewyn 2y ago
    I'll bite, I guess: * In deferrence to Boglehead philosophy, hedging bets is a fool's errand because the idea is you lose your money the more you touch it. Make a plan, invest, and then hold hold hold staying the course come hell or high water. * If you truly want to reduce or eliminate risk, the best way is to simply cash out. A $1 bill will always be a $1 bill with absolute certainty.
    - sodality2 2y ago
      As a boglehead... that's just not how it works in the real world. Some people would treat the loss of $X worse than the gain of $X is good. Thus, they don't have linear value for money (no one really does... if you lose 90% of your bank account, you still have dinner tonight; if you lose all of it, you might not). Some people want to come out neutral or lose a guaranteed small amount, rather than the chance to lose or gain the same amount. I'd pay $5 to avoid having to flip a $10k +/- coin. Thus, if I knew I would lose $10k if X got elected, I could place a $10k bet for Y to win.
kibwen 2y ago
> You're just betting as a hedge just in case that person wins. But this itself is a form of market distortion. It calls to question what, precisely, people think the market is supposed to be measuring, both in theory and in practice.
- cj 2y ago
  Exactly. Similarly, companies impacted by weather have access to trade "weather futures". If it's an extremely dry year, you profit from the weather futures instead of your crops (and vice versa). Buying weather futures isn't necessarily a prediction of what you think the weather will be.
  - joshuamorton 2y ago
    But, it is a function of what you believe the future will be (and your risk tolerance). If you have a higher risk tolerance, you will buy fewer futures. If you believe the next year will be dryer than normal, you will buy more futures than normal. If you believe your crop is likely to be better/more reliable than normal, you will buy fewer futures.
    - dmurray 2y ago
      > If you believe the next year will be dryer than normal, you will buy more futures than normal. The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. The same way you shouldn't buy more flood insurance if you think the next year will be exceptionally wet. You can't really predict that, after all. You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.
      - joshuamorton 2y ago
        > The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. And I'll reiterate, this is a function of your risk-aversion/efficiency. One would expect, for example, climate change to increase the price of weather futures as extreme/problematic weather events become more likely. It's often difficult to see the impact of these changes on the scale of a single farmer, but in aggregate lots of farmers do a market make. > You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup. And the insurance companies have a small army of actuaries who make sure that the prices they provide take into account conditions like the relevant risk factors of where your home is. This is instead of a betting market style concept, where you could instead imagine every individual actuary as a potential insurer.
s1artibartfast 2y ago
With this last election, there were also some big differences across markets, which presents the opportunity for not only hedging, but constructing a win-win set of bets.
- lupire 2y ago
  Not really. Transaction costs / vig (commonly 5%) and counterparty risk eat up theoretical arbitrage profits. The main arbitrage opportunity was in finding ways to place illega bets in the bettor's jurisdiction.
  - s1artibartfast 2y ago
    I read that some markets had >10% differences and from what I can tell, polymarket transaction costs are 2% of profit. That said, Im not sure that all of the listed markets had open financial access, so it stands that there were real reasons the differences were sustained and people didn't do exactly what I said.
gruez 2y ago
>In that case, you're not really betting on who you think will win. You're just betting as a hedge just in case that person wins. Some people did exactly this back in 2016, and just ended up feeling bad, because they were profiting off a "bad" (in their eyes) event.
deleted 2y ago
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deleted 2y ago

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ddp26 2y ago

(Author here.) I agree with this critique in theory, but not in practice. The stakes don't need to be high to encourage strong participation. Corporate prediction markets have already scaled quite far, and those who have studied them don't find evidence of manipulation. Can't let perfect be the enemy of the good! If you want a fuller critique of prediction markets in the corporate setting, see the Dec 2021 article linked near the end [1]. [1] https://forum.effectivealtruism.org/posts/dQhjwHA7LhfE8YpYF/prediction-markets-in-the-corporate-setting https://forum.effectivealtruism.org/posts/dQhjwHA7LhfE8YpYF/...

joe_the_user 2y ago
The stakes don't need to be high to encourage strong participation. OK but strong participation isn't necessarily a positive for the accuracy of a market. The problem is the prediction market with lots of participants can be just outlet for partisans to put forward their opinions. There's a tax on wrong opinions but someone is spending a bucks, the markets won't be a powerful force for changing those opinions. What you want for a prediction market is for the major participants to actively researching the problems - expend money and effort to have a well founded reason for their positions. Markets for random real-world events have the problem that many events don't occur often to weed out arbitrary biases and there may not be any easy or cost effect way to attain a well-founded opinion on the subject.
vlovich123 2y ago
From your own article: > A senior executive saw Prophit give a very low probability that the company would complete the hire of a new senior executive on time (filling the position had been a quarterly objective for the past six quarters). “The betting on this goal was extremely harsh. I am shocked and outraged by the lack of brown-nosing at this company,” the executive said to laughter in a company-wide meeting. But the market was the nudge the execs needed. They subsequently “made some hard decisions” to complete the hire on time. Indeed. The whole point of the prediction markets espoused is to alter the decisions being made. That means the prediction itself can have an impact on the outcome intentionally or otherwise.
- 2y ago

JumpCrisscross 2y ago

> the two are not and cannot be isolated, except for some degenerate cases like trying to guess the output of a true random number generator You’re describing endogeneity. It’s unlikely prediction markets affect natural disaster odds.

kibwen 2y ago
> It’s unlikely prediction markets affect natural disaster odds. They don't need to. Predictions markets for natural disasters exist, we call them insurance companies, and the concept of moral hazard when it comes to insurance is a well-studied topic: https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard
- JumpCrisscross 2y ago
  One, insurance happens at insurance companies and in markets. Two, there are prediction markets for natural disasters. Three, moral hazard doesn’t mean insurance makes natural disasters more likely.
  - kibwen 2y ago
    The distinction matters both because the precise wording of specific contracts will cause distinctions that were not adequately considered by certain participants, and also because of who enforces the contract at a human level. Who determines what does and does not qualify as a natural disaster? If that entity has a stake in one outcome, or is influenced by an entity with a stake in one outcome, that changes the outcome. Both of these are seen in insurance claims, where homeowners find out that rising rainwater does not actually count as a "flood", and where agents of the insurance company are financially incentivized not to pay out at all if they can help it. These factors do not go away just because you take away the insurance company, you've simply diffused them.

strken 2y ago

What do "any real sense" and "scale" mean here? I was watching the Betfair odds during the US election, and that market alone had about $500 million dollars of bets pass through it. Is that not real? Is half a billion dollars not sufficiently scaled up?

mrbombastic 2y ago
They mean that once they reach a certain scale they cease to be predictors and start affecting outcomes, not that it is impossible to allow people to bet on things indefinitely.

mfro 2y ago

You make a very good argument against prediction markets in which the stake has actual material value, but what about markets where the only stake is your reputation? My understanding of the Google platforms is that there were prize rewards for top predictors but largely the rewards were social, which, to me, implies they were not taken particularly seriously. An ideal platform might be one where there is no material incentive but users are instead interested in genuine hypothesizing about future events. Obviously there must be a genuine stake involved, but as we see with Manifold this can be done with 'play money'. Would be very interested to see further discussion about this.

kibwen 2y ago
The two problems I identify with this are 1) it underestimates the distorting effect of social rewards (see also karma farmers and serial confabulators on Reddit) and 2) it overlooks how verifiable reputation can be turned into profit by e.g. account-selling (once again, see Reddit).
eitally 2y ago
Very true. At Google it was treated much like Memegen where top bettors -- like top memers -- were rewarded with clout & notoriety, but it basically stopped there. A lot of the wagers actually were on "inside baseball" topics (will x/y/z be deprecated by a//b/c date, will perf metrics align with targets, etc). There are a few handfuls of folks who are really into it, but the vast majority of use is casual.

s1artibartfast 2y ago

lack of isolation isnt necessarily a insurmountable problem, as the market can still forecast, even if it is sometimes a self fulfilling prophecy. Similarly, this distortion does not necessarily overshadow the utility - e.g. the stock market may have insider trading, but is still an incredibly useful financial tool. They key thing to remember is that these markets can have utility beyond zero-sum betting aspect. For example, the stock market isnt just gamblers betting against each other, but is also a tool for auctioning corporate ownership and raising corporate funds.

jjmarr 2y ago

> This is why we have problems with our current predictions markets, e.g. the stock market (insider trading, etc.) A unit of stock represents a legal claim on a company's assets even in the absence of a market for that stock. In many situations, we do want people to influence the value of their stock. Any company that grants stock is doing so because they expect employees to work harder. There are many cases in which employees with stock grants might make short-sighted decisions for quick profits, but on the whole stock grants make employees into better workers. > A senior executive saw Prophit give a very low probability that the company would complete the hire of a new senior executive on time (filling the position had been a quarterly objective for the past six quarters). “The betting on this goal was extremely harsh. I am shocked and outraged by the lack of brown-nosing at this company,” the executive said to laughter in a company-wide meeting. But the market was the nudge the execs needed. They subsequently “made some hard decisions” to complete the hire on time. In this case, the predictions market would've been useless had the executive team not used it in their decision-making. A pure predictions market would be completely isolated from the event they're trying to predict. But I would say that's not an ideal predictions market.

adamc 2y ago
I think evidence would make this a stronger argument. Most of the people I've known with modest stock grants ignored them, or at least that's what they said -- kind of "maybe it will be worth something, but probably not". For really large grants, I'm sure it's different, but that is a far smaller number of employees.
- leetcrew 2y ago
  stock grants don't solve the principal agent problem at a sufficiently large company. if I have an absolutely incredible year as an IC, I might increase my employers revenue by a few basis points. I have plenty of internal metrics to demonstrate my contribution, but nothing I do measurably affects the stock price.
kibwen 2y ago
The anecdote of the Google executive is a lovely example of why the market failed to work as a predictions market. If you had a stake on Google executives continuing to drag their feet on filling that position based on their past performance, and then they saw that prediction and were so incensed that they stopped dragging their feet, then you lost your stake!! The existence of the market changed the outcome; that's the whole point of the objection here! If you believe the purpose of such a market is to affect the real world in such a way, then sure, that's a reasonable stance... but that's not a market for making predictions, that's a distributed market for bidding on contracts.

ghaff 2y ago

I've spent some time looking at group decision making for specific situations and there are clearly some examples where they work very well--and I think you hit on one of the factors. The individual guesses don't affect the outcome and aren't being used to hedge anything. I think there are some other factors as well but I'm not sure I've ever seen a particularly persuasive framework for when prediction markets can work and when they don't.

currymj 2y ago

the same dynamic is true of insurance, credit default swaps, and lots of other financial products. this causes trouble from time to time but can be managed if the products serve a useful purpose.

duped 2y ago

How does a prediction market for say, hurricanes or earthquakes effect the outcome of those events?

mejutoco 2y ago
An event like a pandemic could be not classified as a pandemic by an authority to avoid paying some insurances compensation. It is not an earthquake, but a similar example, I believe.
saithound 2y ago
Prediction markets work via resolution criteria, and resolution is a human action. So the moment you operationalize any question, prediction markets can affect the outcome. To give an extreme example, when employees of the FHA bet on "Florida hurricane with 100+ casualties in 2024", they don't need to invent a weather control device to make that happen.

__MatrixMan__ 2y ago

I think there are cases where the outcome of the event can be bound to the prediction. Also we should be looking for cases where: > Every prediction with a stake is an incentive to alter the outcome of an event ...is a feature not a bug. For instance, imagine if PR's on core infrastructure (like xz-utils, for instance) were first reviewed by a set of trusted maintainers, and--supposing they pass that gate--were later put into a sort of limbo where people can bet on whether they'll be merged. The maintainers then make a policy around betting that the PR will be merged. They're in charge of whether it actually gets merged or not, so most of the time this is a pretty good bet and they just recycle that money by winning and then re-betting it on the next PR. Of course third parties can also bet in the same way--these would be stakeholders which are not maintainers, but who wish to "sweeten the pot" and encourage people to spend enough time with the pending code that they might find a reason to "bet against the house". No prior coordination between the maintainers and the stakeholders is necessary. Suppose I notice some malicious code in one of these commits which is in the betting phase. (Maybe I do my own testing on pre-release versions as a stakeholder, or maybe I'm a bug bounty hunter.) I can bet that the PR won't be merged. The monetary value of that bet makes it clear that even though I'm a stranger, I'm not a spammer. That "buys" me the attention of the maintainers, and if I'm right about the code being malicious, the maintainers will decide not to merge the commit: I'll have successfully altered the course of events (bad commit doesn't get merged) such that I get paid for having been right.

mrbombastic 2y ago

Great comment, I was fairly horrified to open Robinhood and be faced with a prediction market for the US election. I somehow missed completely that this has been legalized: https://amp.cnn.com/cnn/2024/10/02/business/appeals-court-allows-kalshi-election-betting https://amp.cnn.com/cnn/2024/10/02/business/appeals-court-al...

spencerchubb 2y ago

There are some ways to mitigate this. You can make the prize pool big enough that people will be motivated, but small enough that people won't try to sway the outcome. Also, prediction markets can be very useful for making predictions about competitors, because it would be rather difficult to influence what happens at a competing company.

TheRealNGenius 2y ago
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defen 2y ago

> See also the famous example of how a predictions market for when public figures will die is just an assassination market with extra steps. Why not just write it so that non-natural causes of death don't pay out? More generally, make it so you can't wager on illegal events / outcomes, or ones where a crime materially affected the outcome. Anyway, if someone bets big on a public figure being assassinated, and then that public figure gets assassinated, it would seem like a good place to start investigating would be to look at the people who made a lot of money from that bet.

lupire 2y ago
"why not just" because it destroys the utility. There were 2-3 assassination attempts on Trump this year. It would be valuable to incentive people to share knowledge of assassination vulnerability, to guide security efforts. Banning that defeats the purpose.

skybrian 2y ago

You could as easily say that journalism is an attempt to influence events. And it is, in a way! I think most journalists would be happy to point to situations where their reporting was read by influential people and maybe even changed outcomes. Pulitzer prizes are awarded for that sort of thing. The question is whether this is improper influence? Is it too influential, for bad reasons? I think a more reasonable critique of prediction markets is that it's guesswork laundering. We are given a number, but we don't know why that number was chosen. How can we tell whether it's justified? When markets move, there is a whole industry of people coming up with explanations of why it might have happened - more guesswork! A lucky guess can be helpful if it can be verified, but knowledge should be about more than making guesses. Sharing evidence is important.

directevolve 2y ago

A market can still be well calibrated even if it has a strong causal influence on the topics it’s predicting.

aaron695 2y ago

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millipede 2y ago

In other words, money is speech.

throw_nbvc1234 2y ago

A "good" prediction market is when it functions as an accountability market. The insider trading problem isn't an issue if the outcome is for a greater good. The problem is that money is the easiest way to ensure anonymous predictors are serious about their predictions and getting richer is not a greater good. If you were to require politicians to participate in a reputational prediction market, the aligned incentives might make it a positive thing. You could let ordinary people piggy back participate too, and then use the results to filter through internet/media noise but that starts to smell too social score-ish.

ruuda 2y ago

My experience from predicting on Metaculus, and following this space for a few years, is that it's hard to operationalize the thing you want to predict precisely. Regularly, things go completely sideways in ways that the author did not foresee, and the market ends up hinging on some technicality, rather than the spirit of the question it tried to predict. Some examples: - A question about asset prices specifies FTX as resolution source, but then FTX stopped existing. - There was a question about wether submarine cables in the Red Sea would be destroyed by a hostile act before a certain date. The cables got damaged, but it seemed to be a (suspicious) accident, with very limited independent media coverage. - There is a question about wether YouTube would be blocked in a certain country before 2025. It got throttled, to the point where it is unusable in practice, but not technically blocked. - There is a question trying to forecast LLM progress. How to quantify that? It chose "What is the state of the art score on the Penn Treebank at a certain date?", which was a standard benchmark at the time. But as LLMs evolved, new benchmarks got developed, and although current LLMs probably score much better on the Penn Treebank than a few years ago, nobody reports Penn Treebank score any more. The question ended up being about the popularity of the benchmark rather than LLM progress.