In prediction markets, cost of capital to do trades is a major distorting factor, as are fees and taxes and other physical costs, and participants are much less certain of correct prices and much more worried about impact and how many others are in the same trade. Most everyone who is looking to correct inefficiencies will only fade very large and very obvious inefficiencies, given all the costs.
https://blog.rossry.net/predictit/ has a really good discussion of how this works, with some associated numbers that show how you will probably outright lose money on even apparently ironclad trades like the 112-total candidates above.
Interesting. Am I correct that this implies the larger the house’s cut, the more systematically off we should expect the payouts to be? It seems like PredictIt’s 10% effectively moves the point at which it isn’t worth it to correct the inefficiency further out from equilibrium than in the case of free trades.
That’s exactly correct. It’s a standard taxation-begets-misallocation scenario.
For reference, PI’s current rules have this effect to roughly 0-3% per contract, potentially adding across multiple contracts in a bundle. Prices closer to 50% are worse (though prices further away have their own biases, as Zvi explains).
Yeah, Zvi is (unsurprisingly) right; the change in margining rules (after I wrote that post) makes it much better to sell the low-value contracts, and the withdrawal fees amortize if you’re in for the longer term.
To new rules, and on the back of my envelope, Zvi’s 12% “arbitrage” is something like a few percent good: maybe it covers withdrawal fees on its own, and likely will do so after a few rounds. The opportunity cost of capital is a whole ’nother issue...
I also strongly endorse the punchline that trading (even on the margins of trading costs) is some of the best rationalist training you can find.
Anecdote: In late September I put $20 into PredictIt and followed Zvi’s advice, focusing on the markets for 2020 Democratic nominee and 2020 presidential winner. I was able to increase my money to $86.08, which after the withdrawal fee is $81.78. Because of the $850 per contract limit, a larger initial investment would not have gained any more money. This took a few hours to set up, so it’s not very profitable. But it was fun and informative.
Anecdote, part 2: Around the beginning of April, Andrew Cuomo was added to the presidential (or maybe Democratic nominee?) market, and was trading at roughly 10% (or 5%, or 15%—I really don’t remember). Since I had already had large No positions for everyone else, I got about $60 in negative risk by buying a lot of No shares on Cuomo.
It would be really weird if they charged you 10% on your net winnings, and didn’t tie up the capital to pay that fee, but that is what the written rules imply. If that was true and the issue never corrected, you would pay back most of the cash. 112% would still technically be a win (and you get a full win if the field comes in, of course) but it’s quite the tiny profit.
The 5% is another issue if you plan to move things in and out frequently; I’ve been rolling wins. Rossry’s right that you don’t put money in to then sell 95s, win and withdraw it, but you can do lots of 95s in succession (and probably should from a pure maximizing perspective).
And I certainly haven’t been doing full arbitrage, in general, so there’s that.
All fits the basic hypothesis of ‘things need to be extremely wrong before they are worth fixing.’ I will edit to make sure people realize the fee issue properly.
One weird implication is that if *enough* people do this and force the market back into line with 100% combined probability, you could then close out of your positions with no losses and only wins, and still make a profit. Quirky.
https://blog.rossry.net/predictit/ has a really good discussion of how this works, with some associated numbers that show how you will probably outright lose money on even apparently ironclad trades like the 112-total candidates above.
Interesting. Am I correct that this implies the larger the house’s cut, the more systematically off we should expect the payouts to be? It seems like PredictIt’s 10% effectively moves the point at which it isn’t worth it to correct the inefficiency further out from equilibrium than in the case of free trades.
That’s exactly correct. It’s a standard taxation-begets-misallocation scenario.
For reference, PI’s current rules have this effect to roughly 0-3% per contract, potentially adding across multiple contracts in a bundle. Prices closer to 50% are worse (though prices further away have their own biases, as Zvi explains).
Yeah, Zvi is (unsurprisingly) right; the change in margining rules (after I wrote that post) makes it much better to sell the low-value contracts, and the withdrawal fees amortize if you’re in for the longer term.
To new rules, and on the back of my envelope, Zvi’s 12% “arbitrage” is something like a few percent good: maybe it covers withdrawal fees on its own, and likely will do so after a few rounds. The opportunity cost of capital is a whole ’nother issue...
I also strongly endorse the punchline that trading (even on the margins of trading costs) is some of the best rationalist training you can find.
Anecdote: In late September I put $20 into PredictIt and followed Zvi’s advice, focusing on the markets for 2020 Democratic nominee and 2020 presidential winner. I was able to increase my money to $86.08, which after the withdrawal fee is $81.78. Because of the $850 per contract limit, a larger initial investment would not have gained any more money. This took a few hours to set up, so it’s not very profitable. But it was fun and informative.
Anecdote, part 2: Around the beginning of April, Andrew Cuomo was added to the presidential (or maybe Democratic nominee?) market, and was trading at roughly 10% (or 5%, or 15%—I really don’t remember). Since I had already had large No positions for everyone else, I got about $60 in negative risk by buying a lot of No shares on Cuomo.
It would be really weird if they charged you 10% on your net winnings, and didn’t tie up the capital to pay that fee, but that is what the written rules imply. If that was true and the issue never corrected, you would pay back most of the cash. 112% would still technically be a win (and you get a full win if the field comes in, of course) but it’s quite the tiny profit.
The 5% is another issue if you plan to move things in and out frequently; I’ve been rolling wins. Rossry’s right that you don’t put money in to then sell 95s, win and withdraw it, but you can do lots of 95s in succession (and probably should from a pure maximizing perspective).
And I certainly haven’t been doing full arbitrage, in general, so there’s that.
All fits the basic hypothesis of ‘things need to be extremely wrong before they are worth fixing.’ I will edit to make sure people realize the fee issue properly.
One weird implication is that if *enough* people do this and force the market back into line with 100% combined probability, you could then close out of your positions with no losses and only wins, and still make a profit. Quirky.
I still found this helpful as it allowed me to exit my directional Yang and Buttigieg positions with negative transaction cost.
Huh, I hadn’t noticed that they didn’t tie up the potential fees on your winnings. Hypotheses:
bug introduced when they moved from gross margining to net margining years and didn’t reconsider fees withholding
doesn’t actually matter; they don’t give up ~anything by letting some people carrying small balances make free trades
it’s really hard to abuse this into free trades repeatedly
the withholding here is too complicated and feel-bad to explain
other
I’ve edited this in the OP, mods are requested to re-input the post.