4 ms·

> If things like Kalshi and Polymarket are prediction markets, then, at least as far as the intrinsic concerns of the market itself are concerned, insider tradi

> If things like Kalshi and Polymarket are prediction markets, then, at least as far as the intrinsic concerns of the market itself are concerned, insider trading is a good thing; literally part of the point. That depends on what the effects are. Suppose that predicting things well requires both information and analysis. Early access to information is therefore a competitive advantage: Even if you're not as good at analysis, having the information before anyone else and then getting the analysis right 65% of the time is more often than not going to let you beat the people who get the analysis right 85% of the time once they have the information. Which is to say, it will make it less profitable for the people who are better at analysis to participate in the market, and then fewer of them will. So the question is, what do you want? An answer which is right 65% of the time slightly sooner, or an answer which is right 85% of the time slightly later? It's valid to want the second one.

tptacek 6mo ago
At the point where you're arguing that it's better for a prediction market's prices to be less accurate, I think we've departed the original premise.
- AnthonyMouse 6mo ago
  You're predicting something which is happening in six months but is affected by data which is being published today. Do you want a more accurate price that comes in the afternoon, or a less accurate price that comes in the morning and then stays less accurate for months because the insiders ate too much of the expected profit margin to justify more expensive analysis?
  - tptacek 6mo ago
    I don't understand how your analysis works. How are you proposing people who are right early get run over by people who are right with certainty later?
    - AnthonyMouse 6mo ago
      Suppose there is a yes/no question on a prediction market which currently has "yes" at 0.20 and "no" at 0.80. Some data is about to be published that unambiguously makes "yes" more likely, but it's less obvious how much more likely and a more accurate prediction requires more resources or skill. Further suppose you were going to spend resources analyzing the data and after that your conclusion would be that "yes" is a buy at up to 0.75, i.e. you think there is a 75% chance of it happening. And it turns out you were on the right side because it does end up being yes. If everyone gets the data at the same time, you can start buying "yes" when it's still at 0.20 and keep buying it until it gets up to 0.75. If someone gets the data before you, even if they're (wrongly) less confident than you and only buy at up to 0.55, they start buying a day earlier and by the time the data is published, "yes" is already at 0.55. The result is that you, who were a buyer at up to 0.75, get significantly fewer contracts (because the other sellers already sold to the insider), and worse yet you only get the ones that cost more than 0.55 instead of getting many of the ones that were 0.20. In other words, you make significantly less money when it ultimately turns out you were right. If your average profit is now less than the amount you needed to justify doing the analysis, you stop doing it, and then you don't buy any contracts at all. Then the price ends up stuck at 0.65 "yes" instead of 0.75 "yes" when "yes" was the right answer, because there wasn't enough profit left to fund an analysis that could justify higher confidence in the correct result.

tptacek 6mo ago

At the point where you're arguing that it's better for a prediction market's prices to be less accurate, I think we've departed the original premise.

AnthonyMouse 6mo ago
You're predicting something which is happening in six months but is affected by data which is being published today. Do you want a more accurate price that comes in the afternoon, or a less accurate price that comes in the morning and then stays less accurate for months because the insiders ate too much of the expected profit margin to justify more expensive analysis?
- tptacek 6mo ago
  I don't understand how your analysis works. How are you proposing people who are right early get run over by people who are right with certainty later?
  - AnthonyMouse 6mo ago
    Suppose there is a yes/no question on a prediction market which currently has "yes" at 0.20 and "no" at 0.80. Some data is about to be published that unambiguously makes "yes" more likely, but it's less obvious how much more likely and a more accurate prediction requires more resources or skill. Further suppose you were going to spend resources analyzing the data and after that your conclusion would be that "yes" is a buy at up to 0.75, i.e. you think there is a 75% chance of it happening. And it turns out you were on the right side because it does end up being yes. If everyone gets the data at the same time, you can start buying "yes" when it's still at 0.20 and keep buying it until it gets up to 0.75. If someone gets the data before you, even if they're (wrongly) less confident than you and only buy at up to 0.55, they start buying a day earlier and by the time the data is published, "yes" is already at 0.55. The result is that you, who were a buyer at up to 0.75, get significantly fewer contracts (because the other sellers already sold to the insider), and worse yet you only get the ones that cost more than 0.55 instead of getting many of the ones that were 0.20. In other words, you make significantly less money when it ultimately turns out you were right. If your average profit is now less than the amount you needed to justify doing the analysis, you stop doing it, and then you don't buy any contracts at all. Then the price ends up stuck at 0.65 "yes" instead of 0.75 "yes" when "yes" was the right answer, because there wasn't enough profit left to fund an analysis that could justify higher confidence in the correct result.