None of these things are are really new, but I wish folks like this would better understand what makes markets work:
Markets need participants, capital, liquidity, effort, etc. to become efficient. A lot prediction markets suffer from the fact that volatility in them is limited and that the outcome is not of interest to many people, so the markets cannot really do what markets are supposed to do.
If markets are aggregating crummy data and information, no useful market will form. And that is observable even in much more developed financial markets, where some things really have trouble on price formation. And then you might use auction methods, for example.
Similarly, if stuff happens rarely and you only get very limited shots at being right, then averaging and aggregation or not so useful because you cannot get an average (e.g., can do one thing for the next five years and better be right, for example).
Adding to your point, most successful markets are positive-sum -- hedgers gain value from mitigating their structural risks, and speculators get paid to assume price risk. For example, the wheat futures market has two natural participants -- farmers and bakers. Farmers can sell future produce to buy seeds right now. Bakers can hedge their wheat price exposure to reduce their chance of getting ruined by a bad harvest. Speculators get paid to hold onto wheat futures contracts if a farmer wants to sell a future when the bakers aren't around to buy (presumably baking), selling to a baker later for a higher price reflecting the price risk assumed.
All of these participants derive value from the market.
It's not clear to me that prediction markets usually have natural hedging participants (maybe political operatives, but the tx costs are probably too high relative to the value at stake).
Prediction markets have been a thing for at least 25 years. I get the intellectual appeal, and they may be useful in certain niches. But I think their lack of significant uptake or impact is telling.
Prediction markets have huge positive externalities, as they help non-PM participants predict the future! One problem PMs have is that non-PM participants often feel that people betting short (or in some cases long) are 'hoping for failure'.
Even when you have a market with immense amounts of liquidity, the market won't be efficient if all the participants are wrong.
I remember back in 2012 InTrade had a market for the US Presidential election, the odds were wrong, stayed wrong for months, and actually got more wrong close to the event. You could get hourly liquidity in the tens of thousands almost throughout (I put on $20k in this market, I wasn't touching the sides, it was incredible).
Most of the people who talk a lot about prediction markets haven't worked in markets. Markets aren't magic. They work better with binary outcomes but they cannot be smarter than the people making bets in that market...and they aren't (I have most experience with financial markets, which just don't work well at all, but have quite a bit of experience with binary markets too...they have only become more accurate as our knowledge about the underlying events increased...if you look at binary markets where knowledge is limited in some way, markets are not efficient).
Seconded, predictive quality of markets is not at all a given. For example, financial markets can have real arbitrage opportunities in size open that no-one removes (if capital requirements are high/volatile) - so no unique predictive state then
Yes that's right. The price of a futures contract is not a prediction of the price of the underlying commodity in the future. It's simply today's clearing price between hedgers and speculators. If a hedger feels they are underhedged, they are going to buy (or sell) more of the futures contract until they feel safe, and won't really care about the impact on price of their hedging action. Likewise, speculators can bid prices way up (GameStop?) with little regard for fundamental value today or in the future. It ain't magic...
| A lot prediction markets suffer from the fact that volatility in them is limited and that the outcome is not of interest to many people
+1. This is why I'm more interested these days in prediction markets within (large) institutions, like tech companies, universities, or government agencies.
That way, the participants have (a) a shared domain of interest, and (b) can speculate about internal, nonpublic matters.
Perhaps most importantly, if the prediction market improves the wisdom of the institution, the participants benefit - even if they aren't profitable in the market itself.
It’s a bit presumptuous that these folks don’t understand what makes markets work.
They went into quite a bit of detail but can’t cover everything. Most of the examples were quite top of funnel, fire the CEO markets, economic impacts of new laws being passed. I wouldn’t expect for major bills or companies there would be any shortage of liquidity there.
It’s typical of comments in any forum to mostly be critical, but what takes more guts and cleverness is to connect the dots to improve upon the idea. You seem to have a good mind so I’d encourage you to try applying it in that way.
Bit presumptuous to assume I have not been involved with the creation of markets, trading, etc. I have seen stuff work as well as fail up close in large arenas. [Edit: sorry, I should not snark. You are right that criticizing is easy creation is not.]
Going from academic ideas of markets and experiments to actual deep and useful markets is surprisingly difficult.
EDIT: the failure to create proper working markets for GDP-linked derivatives is good example of something that should but actually ain't. Not enough market making risk takers, limited hedges, unbalanced demand between long and short demand, index issues, ...
I didn’t assume that of you at all, I actually had assumed the opposite and that you had experience in the area.
I agree it would be challenging to have deep and useful markets, but perhaps there’s more innovation to be made there — and many of these high level markets that are top of public consciousness I’d expect to have plenty of liquidity.
Markets need participants, capital, liquidity, effort, etc. to become efficient. A lot prediction markets suffer from the fact that volatility in them is limited and that the outcome is not of interest to many people, so the markets cannot really do what markets are supposed to do.
If markets are aggregating crummy data and information, no useful market will form. And that is observable even in much more developed financial markets, where some things really have trouble on price formation. And then you might use auction methods, for example.
Similarly, if stuff happens rarely and you only get very limited shots at being right, then averaging and aggregation or not so useful because you cannot get an average (e.g., can do one thing for the next five years and better be right, for example).