the trick is that the argument stops working for conditions that start to look like they might trigger. so the argument doesn’t disrupt the idea that conditional prediction markets put the highest price on the best choice, but it does disrupt the idea that the pricings for unlikely conditions are counterfactually accurate.
for intuition, suppose there’s a conditional prediction market for medical treatments for cancer. one of the treatments is “cut off the left leg.” if certain scans and tests come back just the right way (1% chance likely) then cutting off the left leg is the best possible treatment, but otherwise, it’s a dumb idea. if that condition is trading as if it’s very unlikely to be a good idea, you can buy it up at very low risk—most likely, the contract is canceled and you get your money back. but on the off-chance that the scans and tests come back in just the right way, you make a killing.
however, this incentive only exists insofar as “cut off the left leg” is not at risk of winning (before the tests and scans come back). if you thought the leg was going to be cut off simply because everyone else was buying the price up, and that it wouldn’t actually heal the cancer, you’d sell off your shares.
this argument implies that you can’t trust conditional prediction markets with cardinal ranking. however, afaict you’d need other arguments to imply that you can’t trust their choice of “best action.” such arguments probably exist, but this one isn’t sufficient for it. (off the top of my head, i’d consider the case where option A is better for society and option B is better for some malicious actor, and the malicious actor is rich enough to convince the market to take option B. my intuition without thinking further is that this should ‘obviously’ work if the malicious actor is rich enough, in a fashion that’s disanalogous to prediction markets in that it’s not solved automatically with time (because the counterfactuals never settle and so the more-correct traders can’t drain the rich-manipulator’s money), but i haven’t actually thought about it.)
short version: the analogy between a conditional prediction market and the laser-scanner-simulation setup only holds for bids that don’t push the contract into execution. (similarly: i agree that, in conditional prediction markets, you sometimes wish to pay more for a contract that is less valuable in counterfactual expectation; but again, this happens only insofar as your bids do not cause the relevant condition to become true.)
longer version:
suppose there’s a coin that you’re pretty sure is biased such that it comes up heads 40% of the time, and a contract that pays out $1 if the market decides to toss the coin and it comes up heads, and suppose any money you pay for the contract gets refunded if the market decides not to toss the coin. suppose the market will toss the coin if the contracts are selling for more than 50¢.
your argument (as i understand it) correctly points out that it’s worth buying the contract from 40¢ to 45¢, because conditional on the market deciding to toss the coin, probably the market figured out that the coin actually isn’t biased away from heads (e.g. via their laser-scanner and simulator). and so either your 45¢ gets refunded or the contract is worth more than 45¢, either way you don’t lose (aside from the opportunity cost of money). but note that this argument depends critically on the step “the contract going above 50¢ is evidence that the market has determined that the coin is biased towards heads.” but that argument only holds insofar as the people bidding the contracts from (say) 49¢ to 51¢ have actually worked out the coin’s real bias (e.g., have actually run a laser-scanner or whatever).
intuition pump: suppose you bid the coin straight from 40¢ to 51¢ yourself, by accident, while still believing that the coin was very likely 40% likely to come up heads. the market closes in 5 minutes. what should you do? surely the answer is not “reason that, because the market price is above 50¢, somebody must have figured out that the coin is actually biased towards heads;” that’d be madness. sell.
more generally, nobody should bid a conditional branch into the top position unless they personally believe that it’s worth it in counterfactual expectation. (or in other words: the conditional stops meaning “somebody else determined this was worth it” when you’re the one pushing it over the edge; so when it comes to the person pushing the contract into the execution zone, from their perspective, the conditional matches the counterfactual.)