3 ms·

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 betto

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.

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.