Hanson’s answer is that if you know someone is doing this, there’s free money to pick up, and so the incentives push against this. (You don’t have to specifically know that X is out to spike the market, you just have to look at the market and say “whoa, that price is off, I should trade.”) There’s still the problem of linking markets of different sizes—if the prediction market is less liquid and much smaller than the stock market, but the stock market is taking signals from the prediction market, then it makes sense to lose a million on the prediction market to gain a billion on the stock market.
(The solution there is to make the prediction market more liquid and bigger, which currently doesn’t happen for regulatory reasons.)
Hanson’s answer is that if you know someone is doing this, there’s free money to pick up, and so the incentives push against this. (You don’t have to specifically know that X is out to spike the market, you just have to look at the market and say “whoa, that price is off, I should trade.”) There’s still the problem of linking markets of different sizes—if the prediction market is less liquid and much smaller than the stock market, but the stock market is taking signals from the prediction market, then it makes sense to lose a million on the prediction market to gain a billion on the stock market.
(The solution there is to make the prediction market more liquid and bigger, which currently doesn’t happen for regulatory reasons.)