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1) The presence of non-savvy participants should encourage users, after all it means that there is money to be made! If the only users were insider traders, you

1) The presence of non-savvy participants should encourage users, after all it means that there is money to be made! If the only users were insider traders, you'd be mad to join in. 2) Betfair had US election markets with hundreds of thousands of dollars at stake, and this is a site that blocks US users. So the interest and the money is there. (The legal/political problems in many countries are still a big hurdle though) Admittedly, the volumes are still peanuts compared to most sports markets... 3) Not really true. You win a bet if you get the result right, e.g. You predict the result of an event. You don't win by guessing the beliefs of others. Sure, you can trade in and out of a market as opinion changes, but you are still betting on a result and not an opinion.

pdonis 13y ago
You win a bet if you get the result right, e.g. You predict the result of an event. This isn't really true, at least not for most real prediction markets, because bets can be traded. The article gives an example: the author bought bets on McCain for the 2008 election early on when they were cheap, then sold them shortly before the Republican convention when they were fetching much higher prices. In other words, he wasn't really betting on McCain winning; he was betting on enough people believing McCain had good odds of winning that he could sell his McCain bets at a profit--i.e., he was indeed winning by guessing the beliefs of others.
- joosters 13y ago
  Well, first of all, he didn't have to trade! Bets are be settled normally on the event happening or not, regardless of trading or of the motivation of the bettor. Secondly, just because he traded, doesn't mean he was solely betting on the beliefs of others. Odds can change over time because of betting activity caused by events, news and information. e.g. news stories, statements, etc. If those changes mean that the OP could trade out, good for him. Another example: Let's say NASA spots a huge asteriod in space, zooming towards earth. To pass the time, people are betting on whether or not it hits. (Let's not worry about how the bets get paid out!) Common consensus is that there is a 10% chance of a collision, but using your awesome physics knowledge, you reckon there's actually a 30% chance, give-or-take. So, you bet ON the asteroid hitting. A few days later, a news release from an esteemed astronomer reports that her calculations show that the asteroid is more likely to collide than previously thought. As a result, betting activity on the exchange adjusts and the consensus moves to 28%. Now, you might well be tempted to trade out of your bet at this point, and "lock in" a profit. After all, the odds are close to your own beliefs. Did you trade because of guessing the beliefs of others? No. You traded because the odds changed as a result of information changes, new info becoming public knowledge. You thought the original bet was value, and you traded out at zero cost to get certainty.
  - pdonis 13y ago
    What you say about the market odds changing because of changes in information known to the participants is of course true, but it misses my point. The very fact that bets can be traded means that people can profit by betting on the beliefs of others, not on the actual outcome of the event the betting is based on. The example of the McCain bets for the 2008 election is a case in point: if the author's bet would only have paid off on the actual outcome, he would have lost! The only reason he was able to make money at all was that he found other people willing to buy his bets. Similarly, in your asteroid example, yes, you sold your bets because information changed, but the reason you were able to make money doing so was that there were other people willing to buy your bets--which means their expectations about the outcome must have been different from yours (if they were the same as yours, no one would buy your bet, because the trade is zero sum). So you are making money based on others' beliefs about the outcome, not based on the actual outcome. For example, if the asteroid ultimately does not hit, then all your "yes" bets are losing bets; the only reason you made money was that you sold your bets before the fact that they were losing bets became known for certain, just like the article's author did with his McCain bets. But also, even if the asteroid ultimately does hit, your payoff doesn't depend on that, because you sold your bets; someone else, who bought them, ended up making the profit you could have made if you had held them until the outcome was known. So once again, you made your money based on other people's beliefs about the outcome, not based on the actual outcome. (You even agree with this, when you say that you sell when the market odds are close to your own beliefs: the market odds are determined by the average beliefs of all the participants, not by the actual outcome.)
    - aetherson 13y ago
      As a point of fact, the article writer's positions on Obama and McCain that he discusses in the text were to win the nomination, not the general election. He would have won the McCain bet with the full dollar if he had hung on to it. You can read the raw data, less ambiguous than the text, below the main article.
      - pdonis 13y ago
        the article writer's positions on Obama and McCain that he discusses in the text were to win the nomination, not the general election You're right, and I hadn't grasped that from the article. See my response to the article's author upthread.
- gwern 13y ago
  > In other words, he wasn't really betting on McCain winning Actually, I was. I was betting that either I would hold the shares to completion and receive a full payout or enough information would emerge that McCain's odds of winning were higher than then estimated. > The example of the McCain bets for the 2008 election is a case in point: if the author's bet would only have paid off on the actual outcome, he would have lost! And you misunderstood the transactions in question. They weren't whether McCain would win the 2008 election, they were whether he would win the nomination. By the time I sold them, he had locked up dozens more delegates than necessary to guarantee his nomination, and my reason for selling was as stated: the contract was basically settled, I just wanted to avoid him keeling over and costing me my well-earned gains. As it happened, McCain did not die or quit, and so the contract paid out in full. I had been completely right, and was appropriately rewarded.
  - pdonis 13y ago
    you misunderstood the transactions in question. They weren't whether McCain would win the 2008 election, they were whether he would win the nomination. You're right, I hadn't grasped this from reading the article. However, a key point I made still stands: my reason for selling was as stated: the contract was basically settled, I just wanted to avoid him keeling over and costing me my well-earned gains. And the reason you were able to do this is that there were people willing to buy your bets; in other words, that there were people who evaluated the risk of him keeling over differently than you did. If there weren't any such people, you would have had to bear that risk yourself. In other words, the actual bet in question was not whether McCain would "win" the nomination; that had already been settled--he had enough delegates to guarantee that outcome (and the prediction market could just as easily have been based on the bet "will McCain lock up enough delegates to guarantee the nomination"). The bet was whether he would actually become the nominee, i.e., would actually go through the formal procedure that made him the official candidate; that was the outcome that triggered the payoff, and you did not get paid based on that actual outcome; you got paid based on other people's estimate of the probability of that outcome being different from yours. You were only able to sell your bets because your estimate of the probability of that outcome was different than that of the people who bought your bets, based on your higher estimate of the risk of him keeling over; if everyone in the market had estimated the risk of him keeling over as being higher than your estimate, no one would have bought your bets at any price you were willing to sell them for. In other words: you did not "win" the actual bet in question, because you did not hold your bet until the actual outcome was triggered--if you had, you would have won more money than you actually received. If you had correctly predicted that he would not keel over before formally becoming the nominee, you could have gotten that extra money yourself. Of course I understand why you didn't do that: you were willing to give up a few cents on the dollar as a hedge against risk. But that doesn't change the fact that you did do it, and therefore you did not win by making a correct prediction about the actual outcome.

pdonis 13y ago

You win a bet if you get the result right, e.g. You predict the result of an event. This isn't really true, at least not for most real prediction markets, because bets can be traded. The article gives an example: the author bought bets on McCain for the 2008 election early on when they were cheap, then sold them shortly before the Republican convention when they were fetching much higher prices. In other words, he wasn't really betting on McCain winning; he was betting on enough people believing McCain had good odds of winning that he could sell his McCain bets at a profit--i.e., he was indeed winning by guessing the beliefs of others.

joosters 13y ago
Well, first of all, he didn't have to trade! Bets are be settled normally on the event happening or not, regardless of trading or of the motivation of the bettor. Secondly, just because he traded, doesn't mean he was solely betting on the beliefs of others. Odds can change over time because of betting activity caused by events, news and information. e.g. news stories, statements, etc. If those changes mean that the OP could trade out, good for him. Another example: Let's say NASA spots a huge asteriod in space, zooming towards earth. To pass the time, people are betting on whether or not it hits. (Let's not worry about how the bets get paid out!) Common consensus is that there is a 10% chance of a collision, but using your awesome physics knowledge, you reckon there's actually a 30% chance, give-or-take. So, you bet ON the asteroid hitting. A few days later, a news release from an esteemed astronomer reports that her calculations show that the asteroid is more likely to collide than previously thought. As a result, betting activity on the exchange adjusts and the consensus moves to 28%. Now, you might well be tempted to trade out of your bet at this point, and "lock in" a profit. After all, the odds are close to your own beliefs. Did you trade because of guessing the beliefs of others? No. You traded because the odds changed as a result of information changes, new info becoming public knowledge. You thought the original bet was value, and you traded out at zero cost to get certainty.
- pdonis 13y ago
  What you say about the market odds changing because of changes in information known to the participants is of course true, but it misses my point. The very fact that bets can be traded means that people can profit by betting on the beliefs of others, not on the actual outcome of the event the betting is based on. The example of the McCain bets for the 2008 election is a case in point: if the author's bet would only have paid off on the actual outcome, he would have lost! The only reason he was able to make money at all was that he found other people willing to buy his bets. Similarly, in your asteroid example, yes, you sold your bets because information changed, but the reason you were able to make money doing so was that there were other people willing to buy your bets--which means their expectations about the outcome must have been different from yours (if they were the same as yours, no one would buy your bet, because the trade is zero sum). So you are making money based on others' beliefs about the outcome, not based on the actual outcome. For example, if the asteroid ultimately does not hit, then all your "yes" bets are losing bets; the only reason you made money was that you sold your bets before the fact that they were losing bets became known for certain, just like the article's author did with his McCain bets. But also, even if the asteroid ultimately does hit, your payoff doesn't depend on that, because you sold your bets; someone else, who bought them, ended up making the profit you could have made if you had held them until the outcome was known. So once again, you made your money based on other people's beliefs about the outcome, not based on the actual outcome. (You even agree with this, when you say that you sell when the market odds are close to your own beliefs: the market odds are determined by the average beliefs of all the participants, not by the actual outcome.)
  - aetherson 13y ago
    As a point of fact, the article writer's positions on Obama and McCain that he discusses in the text were to win the nomination, not the general election. He would have won the McCain bet with the full dollar if he had hung on to it. You can read the raw data, less ambiguous than the text, below the main article.
    - pdonis 13y ago
      the article writer's positions on Obama and McCain that he discusses in the text were to win the nomination, not the general election You're right, and I hadn't grasped that from the article. See my response to the article's author upthread.
gwern 13y ago
> In other words, he wasn't really betting on McCain winning Actually, I was. I was betting that either I would hold the shares to completion and receive a full payout or enough information would emerge that McCain's odds of winning were higher than then estimated. > The example of the McCain bets for the 2008 election is a case in point: if the author's bet would only have paid off on the actual outcome, he would have lost! And you misunderstood the transactions in question. They weren't whether McCain would win the 2008 election, they were whether he would win the nomination. By the time I sold them, he had locked up dozens more delegates than necessary to guarantee his nomination, and my reason for selling was as stated: the contract was basically settled, I just wanted to avoid him keeling over and costing me my well-earned gains. As it happened, McCain did not die or quit, and so the contract paid out in full. I had been completely right, and was appropriately rewarded.
- pdonis 13y ago
  you misunderstood the transactions in question. They weren't whether McCain would win the 2008 election, they were whether he would win the nomination. You're right, I hadn't grasped this from reading the article. However, a key point I made still stands: my reason for selling was as stated: the contract was basically settled, I just wanted to avoid him keeling over and costing me my well-earned gains. And the reason you were able to do this is that there were people willing to buy your bets; in other words, that there were people who evaluated the risk of him keeling over differently than you did. If there weren't any such people, you would have had to bear that risk yourself. In other words, the actual bet in question was not whether McCain would "win" the nomination; that had already been settled--he had enough delegates to guarantee that outcome (and the prediction market could just as easily have been based on the bet "will McCain lock up enough delegates to guarantee the nomination"). The bet was whether he would actually become the nominee, i.e., would actually go through the formal procedure that made him the official candidate; that was the outcome that triggered the payoff, and you did not get paid based on that actual outcome; you got paid based on other people's estimate of the probability of that outcome being different from yours. You were only able to sell your bets because your estimate of the probability of that outcome was different than that of the people who bought your bets, based on your higher estimate of the risk of him keeling over; if everyone in the market had estimated the risk of him keeling over as being higher than your estimate, no one would have bought your bets at any price you were willing to sell them for. In other words: you did not "win" the actual bet in question, because you did not hold your bet until the actual outcome was triggered--if you had, you would have won more money than you actually received. If you had correctly predicted that he would not keel over before formally becoming the nominee, you could have gotten that extra money yourself. Of course I understand why you didn't do that: you were willing to give up a few cents on the dollar as a hedge against risk. But that doesn't change the fact that you did do it, and therefore you did not win by making a correct prediction about the actual outcome.