5 ms·

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 winn

by 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.
      - JumpCrisscross 2y ago
        > Some people would treat the loss of $X worse than the gain of $X is good Most people. "Loss aversion refers to a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain" [1]. > I'd pay $5 to avoid having to flip a $10k +/- coin Risk aversion. Seemingly related, but in fact quite rational. [1] https://en.wikipedia.org/wiki/Loss_aversion https://en.wikipedia.org/wiki/Loss_aversion
    - TeaBrain 2y ago
      >I'll bite, I guess: > In deferrence to Boglehead philosophy, hedging bets is a fool's errand The flagged comment didn't say that hedging was idiotic, but implied that the specific hedge mentioned was idiotic, yet didn't give any reason for calling it such. >$1 bill will always be a $1 bill with absolute certainty This is money illusion.
    - s1artibartfast 2y ago
      There are bad hedges and good hedges. It is commonplace to take various financial positions that limit downside. It is one of the primary uses of options and futures.
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
[deleted]

by cj 2y ago

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.
    - JumpCrisscross 2y ago
      > Some people would treat the loss of $X worse than the gain of $X is good Most people. "Loss aversion refers to a cognitive bias in which the same situation is perceived as worse if it is framed as a loss, rather than a gain" [1]. > I'd pay $5 to avoid having to flip a $10k +/- coin Risk aversion. Seemingly related, but in fact quite rational. [1] https://en.wikipedia.org/wiki/Loss_aversion https://en.wikipedia.org/wiki/Loss_aversion
  - TeaBrain 2y ago
    >I'll bite, I guess: > In deferrence to Boglehead philosophy, hedging bets is a fool's errand The flagged comment didn't say that hedging was idiotic, but implied that the specific hedge mentioned was idiotic, yet didn't give any reason for calling it such. >$1 bill will always be a $1 bill with absolute certainty This is money illusion.
  - s1artibartfast 2y ago
    There are bad hedges and good hedges. It is commonplace to take various financial positions that limit downside. It is one of the primary uses of options and futures.

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

[deleted]