In most models of prediction markets that I’ve seen so far, stocks aren’t finite. Any investor can pay to create an outcome-neutral bundle.
If the benefiting speculator is willing to pay more than E(D) for a D stock, then other investors can create more and sell D to that buyer for a price greater than E(D) while holding or selling off the rest for net expected profit. In most cases this will result in a price somewhere between E(D) and E(D*).
If E(D*) and E(D) are very close, or the D buyer financially dominates the whole market, then this could still result in market manipulation such that price(D) > E(D*). In the former case, there’s an argument that the correct decision really is D rather than D*: the expected loss to the public is tiny while the benefit to the single person (or perhaps minority coalition) is great enough to outweigh the combined difference to the rest of the market.
The second case is more problematic, but really if a single entity already dominates the markets to that extent, there are other problems.
Would there be a problem when speculators can create stocks in the conditional case? As in if a decision C harms me, can i create and sell loads and loads of C stock, and not having to actually go through the trade when C is not enforced (due to the low price i’ve caused)?
In the simple conditional case with N possible outcomes, you are (in the basic case) paying $1 to create 2N stocks: W|D_i and (1-W)|D_i for each of the N decisions D_i, where W is the agreed welfare metric ranging from 0 to 1. When decision n is implemented and the outcome measured, the W|D_n and (1-W)|D_n stocks pay out appropriately.
So yes, if you never sold your |D_n stocks then you get $(W + 1-W) = $1 back. However, you don’t have an unlimited number of dollars and can’t create an unlimited number of stocks.
In most models of prediction markets that I’ve seen so far, stocks aren’t finite. Any investor can pay to create an outcome-neutral bundle.
If the benefiting speculator is willing to pay more than E(D) for a D stock, then other investors can create more and sell D to that buyer for a price greater than E(D) while holding or selling off the rest for net expected profit. In most cases this will result in a price somewhere between E(D) and E(D*).
If E(D*) and E(D) are very close, or the D buyer financially dominates the whole market, then this could still result in market manipulation such that price(D) > E(D*). In the former case, there’s an argument that the correct decision really is D rather than D*: the expected loss to the public is tiny while the benefit to the single person (or perhaps minority coalition) is great enough to outweigh the combined difference to the rest of the market.
The second case is more problematic, but really if a single entity already dominates the markets to that extent, there are other problems.
Would there be a problem when speculators can create stocks in the conditional case? As in if a decision C harms me, can i create and sell loads and loads of C stock, and not having to actually go through the trade when C is not enforced (due to the low price i’ve caused)?
In the simple conditional case with N possible outcomes, you are (in the basic case) paying $1 to create 2N stocks: W|D_i and (1-W)|D_i for each of the N decisions D_i, where W is the agreed welfare metric ranging from 0 to 1. When decision n is implemented and the outcome measured, the W|D_n and (1-W)|D_n stocks pay out appropriately.
So yes, if you never sold your |D_n stocks then you get $(W + 1-W) = $1 back. However, you don’t have an unlimited number of dollars and can’t create an unlimited number of stocks.