alt Hacker NewsWhat’s the point of prediction markets?
They are just ordinary gambling unless you allow insider trading and manipulation, because that’s the only way the market can acquire and represent novel useful information.
But if you allow those things, you run into a host of well-documented problems which are the reason why those things are forbidden in other markets.
As it stands, prediction markets seem like a tech-aligned rebranding of age-old rigged gambling products.
Replies
In theory no, because it provides financial incentive to perform a comprehensive analysis of available data or conduct thorough investigations. In practice, yep.
The original point is to use crowd wisdom. Crowds seem better than single individuals to predict outcomes of certain types of events.
I think this is visible in sports betting markets. Unless all games are rigged, games outcomes are fairly random events, and betting markets are pretty good at assessing the probabilities of a team winning. Same thing happens in finance. Option markets are really good at assessing the probabilities of asset movements.
The thing though is that these markets are only good in predicting recurring events like game results or financial asset movements. They are good _overall_, as in, if you take 100,000 sport games, the bettings odds are going to be overall in line with what actually happens.
Hence some people deduced that crowds with skin in the game were wise in predicting random stuff. And what happened then is that some of them thought this kind of predictive power could apply to any kind of event, and then predictive markets were created, with the idea that crowds could magically come up with odds for anything, and that would be fairly correct. But what works for recurring events don't hold for single events like Maduro's capture or the end of the Iran war. So the odds in these market is only the result of influence and insider information.
The result is that the odds are generally completely off, unless there is insider information. That's kind of what happened in the 2008 financial crisis. The bets there were on loans defaulting. These events are rare enough that it's impossible to assess their probability easily. And so banks relied on rating agencies (influence), to price the odds of these events happening. Rating agencies were wrong on a lot of these bets, meaning all the bets were placed at very very wrong prices, resulting in the crisis we saw.
The weird outcome of it all, is that those prediction markets have become insider information detectors. That's how they caught the guy. Whoever is winning big on these markets is necessarily cheating.
But I guess the main takeaway for me is that society is in such a state that a lot of people actually bet big on these things. Probably a combination of being fed dreams of fortune since childhood and the american dream not delivering. It's all very sad.
> They are just ordinary gambling unless you allow insider trading and manipulation, because that’s the only way the market can acquire and represent novel useful information.
Representing only public information without agenda is useful in itself. Words are cheap, and which words you get to see and which words you don't get to see is according to some non-truth incentive. Prediction markets say "you get to make money if you know what the truth actually is". Media says "you get to make money if you entertain people".
It's unfortunate there's also significant negative side effects to financialized prediction markets. I'm more favorable to non-financial prediction markets like Manifold, which say "you get to have social status if you know what the truth is". Seems as though that's the right balance, although you could see how such non-financial prediction markets can be more easily defeated by dedicated non-truth actors if it became prominent in the public conversation.