Are there formal models of the behavior of prediction markets like this? Some questions that such a theory might answer:
Is there an equivalence between, say, “I am a bettor with no stakes in the matter, and believe there is a 10% chance of a coup”, and “I am the Mars government and my utility function prefers ‘coup’ to ‘not-coup’ at 10-to-1″? In both cases, it seems relevant that the agent only has a finite money supply: if the bettor only has $1, the profit they can make and the amount they can move the market is limited, and if Mars “only” stands to gain $5 million from the coup then they’re not willing to lose more than $5 million in the market to make it happen.
In a group of pure bettors, what’s the relationship between their beliefs, their money supply, and at what price the market will stabilize? I’m assuming you’d model the bettors as obeying the Kelly criterion here. If bettors can learn from how other bettors bet, what are the incentives for betting early vs. late? I imagine this has been extensively studied in economics?
If you want to subsidize a market, are there results relating how much you need to subsidize to elicit a certain amount of betting, given other assumptions?
Are there formal models of the behavior of prediction markets like this? Some questions that such a theory might answer:
Is there an equivalence between, say, “I am a bettor with no stakes in the matter, and believe there is a 10% chance of a coup”, and “I am the Mars government and my utility function prefers ‘coup’ to ‘not-coup’ at 10-to-1″? In both cases, it seems relevant that the agent only has a finite money supply: if the bettor only has $1, the profit they can make and the amount they can move the market is limited, and if Mars “only” stands to gain $5 million from the coup then they’re not willing to lose more than $5 million in the market to make it happen.
In a group of pure bettors, what’s the relationship between their beliefs, their money supply, and at what price the market will stabilize? I’m assuming you’d model the bettors as obeying the Kelly criterion here. If bettors can learn from how other bettors bet, what are the incentives for betting early vs. late? I imagine this has been extensively studied in economics?
If you want to subsidize a market, are there results relating how much you need to subsidize to elicit a certain amount of betting, given other assumptions?