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Prediction markets like Polymarket solve this by not having bookies. Just bet against other players. Why bet against a house who takes an enormous cut even whe

Prediction markets like Polymarket solve this by not having bookies. Just bet against other players. Why bet against a house who takes an enormous cut even when you win when you could bet in an efficient market and keep 100% of your winnings?

Waterluvian 2y ago
Are prediction markets essentially zero sum where every outcome is fully covered by all the bets? Minus fees I’m guessing.
- maxbond 2y ago
  Yep. For the ones I've looked into, orders match when they sum to $1. Eg, I bid $0.75 on yes and you bid $0.25 on no. The contracts are very carefully written such that they are mutually exclusive, only one of us gets $1 when the contract resolves. And like you suggest, you pay a fee on the way out.
- zarmin 2y ago
  If this is the case, it kills me that online poker is still illegal federally. Zero sum skill game minus fees.
  - zahlman 2y ago
    The issue here is that "skill game" is something that lawyers would have to prove to judges.
  - Waterluvian 2y ago
    Is it technically possible to encode a whole game of hold’em using one of these markets?
- snthpy 2y ago
  That's called parimutuel being and the broker just takes a vig (vigorish). It's analogous to agency based trading in finance. The broker can also set the odds and act as a market maker, like principal based trading in finance.
benreesman 2y ago
Haha whenever people tell me they own NVDA or whatever I tell them that the four hundred basis points more than pays for free drinks.
- cuu508 2y ago
  Can you please explain a bit more? Is "NVDA" the NVIDIA ticker? What do the 400 basis points mean? Who is paying for, and who is getting free drinks?
  - lofaszvanitt 2y ago
    It's a joke. Claude will explain it to you.
  - benreesman 2y ago
    If you play perfect basic strategy on a six card shoe at the Wynn your odds are a matter of some dispute but a reasonable consensus figure might be on the order of 1% to the house, or a hundred basis points. Only professionals can maintain perfect basic 21 for any serious stretch, a tourist who keeps their wits is probably at something like a 4% disadvantage, or 400 bps. I was making fun of people who sit down at a table with Citadel as their counterparty and don’t consider it gambling.
    - greyw 2y ago
      The bid ask spread is not even 10 basispoints for your regular stocks out there. In fact for NVDA right now it's less than 1 basispoint. Anyhow the comparison doesnt make a whole lot of sense
      - benreesman 2y ago
        There are a lot of different forms of Fama EMH, but even under very weak versions of it an uninformed speculator has the uniform geometric Brownian motion of holding an equity pretty much pegged at 0.5, expected value is par in the absence of an arbitrage opportunity. This is eliding fees and other friction, and eliding the market microstructure in a stand price-time precedence setting. People (uninformed speculators) routinely think they have alpha by virtue of knowledge that was priced into a Citadel regression days, weeks, or months before they obtained it. Uninformed speculators are almost by definition gamblers, and it’s pretty much a set cover between gamblers and arbitrageurs. I wasn’t making fun of arbitrageurs. P.S. Equities on Island and ARCA are decimalized on the consolidated tape, lit venues can’t have a spread less than one penny.
taneq 2y ago
Why make bets as the house when you could just take a cut risk free?
- 55555 2y ago
  so how do you decide where the odds should start? I think they still need a bookmaker for this, I think. What happens when the first person bets? I have never read up on how poly market works but I believe they must act as an Automated Market Maker as they provide instant liquidity.
  - grogenaut 2y ago
    you don't really care... you just adjust the odds you are offering to balance the books with each bet and until you get good or get a nut you put limits on the bet sizes so it's easier to bin pack the bets. This was super common with sports bookies pre just holding the vegas line. Get a huge bet on paul that you don't have offset? offer better odds on tyson till it balances. as a bookie your goal at the end of the day is to have the most total amount of bets on the book (say 1M in total wagers) where the money placed at the odds completely evens out so that at the end of the day you take 10% of 1 million for providing the market (the vig) and pay one set of betters with the other's money. In fact as the house you're just building creating your own arbitrage by inventing currency exchange rates.
  - foobar1962 2y ago
    Back in the 1980s I did some work on a computerised tabulation system for a large race course: my part was programming EPROMS for the displays, but I learned a lot about the system from that time. Basically, the house takes their cut from all the bets. The house cannot lose. Then they share whatever's left amongst the winners. The returns for a $1 bet on a horse are calculated in real time and displayed on the screens. THESE ARE NOT THE FINAL ODDS, they change as bets are placed right up until the race starts, which is the starting price (and where the term SP bookmakers comes from). Contrast this with bookmakers at the track who offer fixed odds when the bets are placed. They stand a chance of losing if they get their numbers wrong.
Rastonbury 2y ago
The reason is fact that bookies are odds makers while bettors are odds takers. Theoretically you can't win if a market is perfectly efficient. When market depth can be in the hundreds for the less popular things like e-sports, someone betting a few hundred will make the odds converge to true probability. Assume bettor's model and the bookie's model represent the true probability of an event with added random noise, neither model is perfect but one is not better than the other. For any bet, the true probability will on average be between the bettor and the bookie's implied probability. However, the bettor bets only when their model shows a higher probability than the bookmaker's, thus they gain positive value over time. The bookie is disadvantaged because they can't use the bettor's information to set odds, while the bettor can use the bookmaker's odds and make a decision to bet. Remember here that they are running the same model, the bettor doesn't even have an advantage. Because of this, there is no one on Polymarket running a model offering odds on all possible markets (acting like a bookmaker), it will just lose money. A bookie probably has to offer all odds on all games, in order to compete with other bookmakers. The idea is from William Benter's paper[1], the guy who made a 1bn betting on horses. The books are probably well aware of this, which is why they will ban anyone who wins consistently with a good enough model, they can only ban the person or stop making odds on that market which obviously is not a good idea [1] https://gwern.net/doc/statistics/decision/1994-benter.pdf https://gwern.net/doc/statistics/decision/1994-benter.pdf
lottin 2y ago
You're not betting against the house. The house always takes opposing bets so that it's fully hedged. The players are betting against each other.

Waterluvian 2y ago

Are prediction markets essentially zero sum where every outcome is fully covered by all the bets? Minus fees I’m guessing.

maxbond 2y ago
Yep. For the ones I've looked into, orders match when they sum to $1. Eg, I bid $0.75 on yes and you bid $0.25 on no. The contracts are very carefully written such that they are mutually exclusive, only one of us gets $1 when the contract resolves. And like you suggest, you pay a fee on the way out.
zarmin 2y ago
If this is the case, it kills me that online poker is still illegal federally. Zero sum skill game minus fees.
- zahlman 2y ago
  The issue here is that "skill game" is something that lawyers would have to prove to judges.
- Waterluvian 2y ago
  Is it technically possible to encode a whole game of hold’em using one of these markets?
snthpy 2y ago
That's called parimutuel being and the broker just takes a vig (vigorish). It's analogous to agency based trading in finance. The broker can also set the odds and act as a market maker, like principal based trading in finance.

benreesman 2y ago

Haha whenever people tell me they own NVDA or whatever I tell them that the four hundred basis points more than pays for free drinks.

cuu508 2y ago
Can you please explain a bit more? Is "NVDA" the NVIDIA ticker? What do the 400 basis points mean? Who is paying for, and who is getting free drinks?
- lofaszvanitt 2y ago
  It's a joke. Claude will explain it to you.
- benreesman 2y ago
  If you play perfect basic strategy on a six card shoe at the Wynn your odds are a matter of some dispute but a reasonable consensus figure might be on the order of 1% to the house, or a hundred basis points. Only professionals can maintain perfect basic 21 for any serious stretch, a tourist who keeps their wits is probably at something like a 4% disadvantage, or 400 bps. I was making fun of people who sit down at a table with Citadel as their counterparty and don’t consider it gambling.
  - greyw 2y ago
    The bid ask spread is not even 10 basispoints for your regular stocks out there. In fact for NVDA right now it's less than 1 basispoint. Anyhow the comparison doesnt make a whole lot of sense
    - benreesman 2y ago
      There are a lot of different forms of Fama EMH, but even under very weak versions of it an uninformed speculator has the uniform geometric Brownian motion of holding an equity pretty much pegged at 0.5, expected value is par in the absence of an arbitrage opportunity. This is eliding fees and other friction, and eliding the market microstructure in a stand price-time precedence setting. People (uninformed speculators) routinely think they have alpha by virtue of knowledge that was priced into a Citadel regression days, weeks, or months before they obtained it. Uninformed speculators are almost by definition gamblers, and it’s pretty much a set cover between gamblers and arbitrageurs. I wasn’t making fun of arbitrageurs. P.S. Equities on Island and ARCA are decimalized on the consolidated tape, lit venues can’t have a spread less than one penny.

taneq 2y ago

Why make bets as the house when you could just take a cut risk free?

55555 2y ago
so how do you decide where the odds should start? I think they still need a bookmaker for this, I think. What happens when the first person bets? I have never read up on how poly market works but I believe they must act as an Automated Market Maker as they provide instant liquidity.
- grogenaut 2y ago
  you don't really care... you just adjust the odds you are offering to balance the books with each bet and until you get good or get a nut you put limits on the bet sizes so it's easier to bin pack the bets. This was super common with sports bookies pre just holding the vegas line. Get a huge bet on paul that you don't have offset? offer better odds on tyson till it balances. as a bookie your goal at the end of the day is to have the most total amount of bets on the book (say 1M in total wagers) where the money placed at the odds completely evens out so that at the end of the day you take 10% of 1 million for providing the market (the vig) and pay one set of betters with the other's money. In fact as the house you're just building creating your own arbitrage by inventing currency exchange rates.
- foobar1962 2y ago
  Back in the 1980s I did some work on a computerised tabulation system for a large race course: my part was programming EPROMS for the displays, but I learned a lot about the system from that time. Basically, the house takes their cut from all the bets. The house cannot lose. Then they share whatever's left amongst the winners. The returns for a $1 bet on a horse are calculated in real time and displayed on the screens. THESE ARE NOT THE FINAL ODDS, they change as bets are placed right up until the race starts, which is the starting price (and where the term SP bookmakers comes from). Contrast this with bookmakers at the track who offer fixed odds when the bets are placed. They stand a chance of losing if they get their numbers wrong.

Rastonbury 2y ago

The reason is fact that bookies are odds makers while bettors are odds takers. Theoretically you can't win if a market is perfectly efficient. When market depth can be in the hundreds for the less popular things like e-sports, someone betting a few hundred will make the odds converge to true probability. Assume bettor's model and the bookie's model represent the true probability of an event with added random noise, neither model is perfect but one is not better than the other. For any bet, the true probability will on average be between the bettor and the bookie's implied probability. However, the bettor bets only when their model shows a higher probability than the bookmaker's, thus they gain positive value over time. The bookie is disadvantaged because they can't use the bettor's information to set odds, while the bettor can use the bookmaker's odds and make a decision to bet. Remember here that they are running the same model, the bettor doesn't even have an advantage. Because of this, there is no one on Polymarket running a model offering odds on all possible markets (acting like a bookmaker), it will just lose money. A bookie probably has to offer all odds on all games, in order to compete with other bookmakers. The idea is from William Benter's paper[1], the guy who made a 1bn betting on horses. The books are probably well aware of this, which is why they will ban anyone who wins consistently with a good enough model, they can only ban the person or stop making odds on that market which obviously is not a good idea [1] https://gwern.net/doc/statistics/decision/1994-benter.pdf https://gwern.net/doc/statistics/decision/1994-benter.pdf

lottin 2y ago

You're not betting against the house. The house always takes opposing bets so that it's fully hedged. The players are betting against each other.