just saying that prediction markets are not perfectly efficient
I wouldn’t say anyone is really discussing perfect efficiency. You could reasonably say roulette is a fairly efficidnt market, the price accurately reflects 95% of the value.
There isn’t really value you can reliably, fairly make off them (otherwise someone like Jane Street would probably have scooped it up). You may be able to make money in some, but odds are more likely than not you are wrong and the juice isn’t worth the squeeze.
Close enough that it sometimes makes sense to act as if market probability = true probability.
Yes, and if that is the case, your chances are greater than not that no matter how intelligent you are if that is true using a prediction market will lose you money.
still have great utility
What, though? The main valid arguments for utility i see—risk management and price discovery—are not how the platforms are being used or not good reasons to trade (on current platforms) respectively. To be clear, I think there are valid arguments for utility in potential, but what is currently being promoted by proponents in extant markets doesn’t match the potential utility.
instead you create a market and put $10k in the automatic market maker to incentivize people to make their best guess.
In theory, maybe. In reality, doesn’t happen on any current platforms. To the extent they adopt automatic market makers, those market makers act more as bookies, providing liquidity only at prices in excess of reasonable fair odds. Some play money platforms use automatic market makers designed to encourage price discovery (which Hanson has advocated for) but I am not aware of any large prediction markets that do so.
Also the prediction markets are not negative sum for society as a whole, the fee doesn’t just evaporate
They have costs and there still is time value issues (to be truly net-zero, the total value of any position on average would have to appreciate by the risk-free rate + a risk premium), so it is still a net negative sum in that sense.
But I was talking from the perspective of a person trading, not society as a whole.
Taking money from dumb people in a zero-sum game is fine.
I don’t necessarily think so. Like, a lot of scams are zero sum, but I would say scamming people is still wrong (even in cases where it might not legally be fraud). Taking advantage of people being gullible or gamblers is generally something I would not view favorably, and where there is a net loss (as is the case with, say, gambling at a casino) my default is to take a rather skeptical view.
In the case of equity, there is the fairly valid claim that it determines how equity is allocated, and by definition more efficiently allocating equity leads to greater economic product and therefore a net positive (and equity tends to increase in value above the risk free rate). Traders in prediction markets aren’t really doing that; they are not capital markets.
I wouldn’t say anyone is really discussing perfect efficiency. You could reasonably say roulette is a fairly efficidnt market, the price accurately reflects 95% of the value.
There isn’t really value you can reliably, fairly make off them (otherwise someone like Jane Street would probably have scooped it up). You may be able to make money in some, but odds are more likely than not you are wrong and the juice isn’t worth the squeeze.
Yes, and if that is the case, your chances are greater than not that no matter how intelligent you are if that is true using a prediction market will lose you money.
What, though? The main valid arguments for utility i see—risk management and price discovery—are not how the platforms are being used or not good reasons to trade (on current platforms) respectively. To be clear, I think there are valid arguments for utility in potential, but what is currently being promoted by proponents in extant markets doesn’t match the potential utility.
In theory, maybe. In reality, doesn’t happen on any current platforms. To the extent they adopt automatic market makers, those market makers act more as bookies, providing liquidity only at prices in excess of reasonable fair odds. Some play money platforms use automatic market makers designed to encourage price discovery (which Hanson has advocated for) but I am not aware of any large prediction markets that do so.
They have costs and there still is time value issues (to be truly net-zero, the total value of any position on average would have to appreciate by the risk-free rate + a risk premium), so it is still a net negative sum in that sense.
But I was talking from the perspective of a person trading, not society as a whole.
I don’t necessarily think so. Like, a lot of scams are zero sum, but I would say scamming people is still wrong (even in cases where it might not legally be fraud). Taking advantage of people being gullible or gamblers is generally something I would not view favorably, and where there is a net loss (as is the case with, say, gambling at a casino) my default is to take a rather skeptical view.
In the case of equity, there is the fairly valid claim that it determines how equity is allocated, and by definition more efficiently allocating equity leads to greater economic product and therefore a net positive (and equity tends to increase in value above the risk free rate). Traders in prediction markets aren’t really doing that; they are not capital markets.