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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 th

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.)

pdonis 13y ago
I wasn't saying the predictions never change; I was saying that they will only change as long as there is knowledge about the outcome that has not yet been priced into the market. The market "not changing" does not mean it does not have a market price: it just means that the market price is constant (and that therefore there is no trading happening, except for the occasional new player entering and quickly losing money by playing a non-optimal strategy). You are saying the same thing, just in different words. the predictions do tend to get better, even if you have unskilled participants This statement as it stands is way too strong, which is why I originally objected. The correct statement is: "predictions will tend to get better as long as it is possible for the average skill level of the market participants to increase". You're right that participants don't have to start out being skilled; but the average skill level of the participants does have to be able to change for the market's predictions to change. In the coin flip prediction market, that can't happen (or at least it can't happen for very long), because the optimal strategy for betting on coin flips is so obvious. In the Betfair card games, there is some scope for increasing participant skill, but there can't be very much if the games are fair; people will fairly quickly figure out the optimal strategy for any given game, and soon after that the market will stop trading if the players are rational. (You appear to agree with this, since you say it's "disappointing" that Betfair's games continue to have money traded on them.) Of course these are simple examples; what about real-world prediction markets? What about, for example, betting on sports games? My sense is that a similar effect occurs there: the average skill level of the long-term market participants is relatively unchanged over time, and therefore the accuracy of the predictions that can be extracted from the order book is relatively constant over time. The reason money is still made in these markets is that there is a basically inexhaustible supply of new players who think they know more than they actually do, and who therefore quickly end up losing their money to the long-term players--much the same thing that happens in casinos.

pdonis 13y ago

I wasn't saying the predictions never change; I was saying that they will only change as long as there is knowledge about the outcome that has not yet been priced into the market. The market "not changing" does not mean it does not have a market price: it just means that the market price is constant (and that therefore there is no trading happening, except for the occasional new player entering and quickly losing money by playing a non-optimal strategy). You are saying the same thing, just in different words. the predictions do tend to get better, even if you have unskilled participants This statement as it stands is way too strong, which is why I originally objected. The correct statement is: "predictions will tend to get better as long as it is possible for the average skill level of the market participants to increase". You're right that participants don't have to start out being skilled; but the average skill level of the participants does have to be able to change for the market's predictions to change. In the coin flip prediction market, that can't happen (or at least it can't happen for very long), because the optimal strategy for betting on coin flips is so obvious. In the Betfair card games, there is some scope for increasing participant skill, but there can't be very much if the games are fair; people will fairly quickly figure out the optimal strategy for any given game, and soon after that the market will stop trading if the players are rational. (You appear to agree with this, since you say it's "disappointing" that Betfair's games continue to have money traded on them.) Of course these are simple examples; what about real-world prediction markets? What about, for example, betting on sports games? My sense is that a similar effect occurs there: the average skill level of the long-term market participants is relatively unchanged over time, and therefore the accuracy of the predictions that can be extracted from the order book is relatively constant over time. The reason money is still made in these markets is that there is a basically inexhaustible supply of new players who think they know more than they actually do, and who therefore quickly end up losing their money to the long-term players--much the same thing that happens in casinos.