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But you are investing with something, namely your own money, and it is this that gives the prediction markets value. Anyone can shout out their silly prediction

But you are investing with something, namely your own money, and it is this that gives the prediction markets value. Anyone can shout out their silly predictions, but if they have to back them up with cash, then the predictions tend to get better. The article has a quote that sums it up well: "The usual touchstone of whether what someone asserts is mere persuasion or at least a subjective conviction, i.e., firm belief, is betting. Often someone pronounces his propositions with such confident and inflexible defiance that he seems to have entirely laid aside all concern for error. A bet disconcerts him. Sometimes he reveals that he is persuaded enough for one ducat but not for ten. For he would happily bet one, but at 10 he suddenly becomes aware of what he had not previously noticed, namely that it is quite possible that he has erred."

pdonis 13y ago
the predictions tend to get better Only if there is some actual predictive skill out there to begin with. For example, the article gives the example of a prediction market on coin flips: the winning strategy is to take any bet for less than $1 (assuming that the payoff on a successful prediction is $2). But in short order, everyone who does not play that strategy will go bankrupt, and then there will be no more betting, because everyone remaining in the market will only take a bet at less than $1, but nobody will be willing to offer one. In other words, if there is an obvious limit to how well something can be predicted, the market will reach that point and then stop--no further betting will happen.
- joosters 13y ago
  Not true at all! A golden example is Betfair's 'exchange games' markets, where they let players bet on fair, computer-managed card games. The markets are always exactly prcied-up. Some punters are playing, but even without the 'mugs' you can just look at the order book to see the predictions. For the coin flip, you'd still have people asking for odds of 50.1% and others offering odds of 49.9% - you then can just look at the spread to discover the market prediction.
  - pdonis 13y ago
    The markets are always exactly prcied-up. Isn't this in agreement with what I said? I didn't say that the market prices would not reflect the expected predictions. I said that once that happens the market will stop moving, which appears to be exactly what you're saying: you can just look at the order book to see the predictions. In other words, there is a limit to how accurately people can predict the outcomes of these card games, and that limited predictive accuracy is what the market reflects. The real question is, how much betting volume is there for a given, fixed card game, once all the players in the market learn the odds? My expectation is that volume will decrease over time for a given, fixed card game, because if the game is fair, the betting is zero-sum, so players who know the optimal strategy will never bet among themselves (since you can't make money on average at zero-sum bets), and players who don't know the optimal strategy will go bankrupt. Obviously if you introduce a new card game, the above doesn't apply; that would be the equivalent of adding, say, six-sided dice to the coin flip betting site: now there's a new set of odds to be learned, so there will be a new period of trading as market players learn the optimal strategy for this new game. For the coin flip, you'd still have people asking for odds of 50.1% and others offering odds of 49.9% Would any actual bets happen at these odds? What makes you think so? An occasional new player might try this, but he would end up losing money, and all the long-term players know that would happen, so they won't try it. Why would they? Or do you just mean that people would be posting these asks/offers, but nobody would be accepting them? If so, then, once again, this is in agreement with what I was saying; no actual activity would be taking place in the market, but the asks/offers would accurately reflect the market's best available prediction--which is the best possible prediction, hence no money can be made in the market because trades are zero-sum.
    - joosters 13y ago
      I was writing to highlight your seeming disagreement with the text you quoted: the predictions tend to get better You seemed to be saying that this was not the case, citing a coin flip. My counter argument is that a real-world prediction market for (effectively) a coin flip tends towards a 'perfect' prediction. It can then stay in this steady-state regardless of whether or not any fool continues to bet; you just have to glance at the order book of unmatched bets to discern the prediction. So, the predictions do tend to get better, even if you have unskilled participants. Or are you saying "predictions only get better if people are good at predicting", which would be stating the bleeding obvious, right? (Disappointingly, Betfair's exchange games still seem to have money traded on them, and they run these games every minute of the day.)
normloman 13y ago
Thanks, but I don't need you to explain the theory behind prediction markets to me. I agree that by forcing people to put money behind their predictions, they will be less subject to bias. But even without those biases, we're really bad at predicting the future. I suppose prediction markets might make accurate short term predictions for events which we already know a lot about. But the events that make the most impact in business, politics, and technology are inherently unpredictable. So I can't see the benefit behind prediction markets. Furthermore: Nothing changes the fact that it's still gambling. You aren't providing liquidity. You're not funding a business venture. You're just betting on the likelihood of something happening. It's still gambling, and you might as well bet on horses. A great choice if you've got money to lose, but don't care for horses much.

pdonis 13y ago

the predictions tend to get better Only if there is some actual predictive skill out there to begin with. For example, the article gives the example of a prediction market on coin flips: the winning strategy is to take any bet for less than $1 (assuming that the payoff on a successful prediction is $2). But in short order, everyone who does not play that strategy will go bankrupt, and then there will be no more betting, because everyone remaining in the market will only take a bet at less than $1, but nobody will be willing to offer one. In other words, if there is an obvious limit to how well something can be predicted, the market will reach that point and then stop--no further betting will happen.

joosters 13y ago
Not true at all! A golden example is Betfair's 'exchange games' markets, where they let players bet on fair, computer-managed card games. The markets are always exactly prcied-up. Some punters are playing, but even without the 'mugs' you can just look at the order book to see the predictions. For the coin flip, you'd still have people asking for odds of 50.1% and others offering odds of 49.9% - you then can just look at the spread to discover the market prediction.
- pdonis 13y ago
  The markets are always exactly prcied-up. Isn't this in agreement with what I said? I didn't say that the market prices would not reflect the expected predictions. I said that once that happens the market will stop moving, which appears to be exactly what you're saying: you can just look at the order book to see the predictions. In other words, there is a limit to how accurately people can predict the outcomes of these card games, and that limited predictive accuracy is what the market reflects. The real question is, how much betting volume is there for a given, fixed card game, once all the players in the market learn the odds? My expectation is that volume will decrease over time for a given, fixed card game, because if the game is fair, the betting is zero-sum, so players who know the optimal strategy will never bet among themselves (since you can't make money on average at zero-sum bets), and players who don't know the optimal strategy will go bankrupt. Obviously if you introduce a new card game, the above doesn't apply; that would be the equivalent of adding, say, six-sided dice to the coin flip betting site: now there's a new set of odds to be learned, so there will be a new period of trading as market players learn the optimal strategy for this new game. For the coin flip, you'd still have people asking for odds of 50.1% and others offering odds of 49.9% Would any actual bets happen at these odds? What makes you think so? An occasional new player might try this, but he would end up losing money, and all the long-term players know that would happen, so they won't try it. Why would they? Or do you just mean that people would be posting these asks/offers, but nobody would be accepting them? If so, then, once again, this is in agreement with what I was saying; no actual activity would be taking place in the market, but the asks/offers would accurately reflect the market's best available prediction--which is the best possible prediction, hence no money can be made in the market because trades are zero-sum.
  - joosters 13y ago
    I was writing to highlight your seeming disagreement with the text you quoted: the predictions tend to get better You seemed to be saying that this was not the case, citing a coin flip. My counter argument is that a real-world prediction market for (effectively) a coin flip tends towards a 'perfect' prediction. It can then stay in this steady-state regardless of whether or not any fool continues to bet; you just have to glance at the order book of unmatched bets to discern the prediction. So, the predictions do tend to get better, even if you have unskilled participants. Or are you saying "predictions only get better if people are good at predicting", which would be stating the bleeding obvious, right? (Disappointingly, Betfair's exchange games still seem to have money traded on them, and they run these games every minute of the day.)

normloman 13y ago

Thanks, but I don't need you to explain the theory behind prediction markets to me. I agree that by forcing people to put money behind their predictions, they will be less subject to bias. But even without those biases, we're really bad at predicting the future. I suppose prediction markets might make accurate short term predictions for events which we already know a lot about. But the events that make the most impact in business, politics, and technology are inherently unpredictable. So I can't see the benefit behind prediction markets. Furthermore: Nothing changes the fact that it's still gambling. You aren't providing liquidity. You're not funding a business venture. You're just betting on the likelihood of something happening. It's still gambling, and you might as well bet on horses. A great choice if you've got money to lose, but don't care for horses much.