Good to know :)
I do agree that subsidies run into a tragedy-of-commons scenario. So despite subsidies are beneficial, they are not sufficient.
But do you find my solution to be satisfactory?
I thought about it a lot, I even seriously considered launching my own prediction market and wrote some code for it. I strongly believe that simply allowing the usage of other assets solves most of the practical problems, so I would be happy to hear any concerns or further clarify my point.
Or another, perhaps easier solution (I updated my original answer): just allow the market company/protocol to invest the money which are “locked” until resolution to some profit generating strategy and share the profit with users. Of course, it should be diversified, both in terms of investment portfolio and across individual markets (users get the same annual rate of return, no matter what particular thing they bet on). It has some advantages and disadvantages, but I think it’s a more clear-cut solution.
Thanks, I think I understand your concern well now.
I am generally positive about the potential of prediction markets if we will somehow resolve the legal problems (which seems unrealistic in the short term but realistic in the medium term).
Here is my perspective on “why should a normie who is somewhat risk-averse, don’t enjoy wagering for its own sake, and doesn’t care about the information externalities, engage with prediction markets”
First, let me try to tackle the question at face value:
“A normie” can describe a large social group, but it’s too general to describe a single person. You can be a normie, but maybe you work at a Toyota dealership. Maybe you just accidentally overheard that the head of your department was talking on the phone and said that recently there were major problems with hydrogen cars which are likely to delay deployment by a few years. If there is a prediction market for hydrogen cars, you can bet and win (or at least you can think that you will win). It’s relatively common among normies to think along the lines “I bought a Toyota car and it’s amazing, I will buy Toyota stock and it will make me rich”. Of course, such thinking is usually invalid, Toyota’s quality is probably already priced in, so it’s a toss of a coin if it will overperform the broader market or not. Overall, it’s probably not a bad idea to buy Toyota stock, but some people do it not because it’s an ok idea but because they think it’s an amazing idea. I expect the same dynamics to play in prediction markets.
Even if you don’t enjoy “wagering for its own sake”, prediction markets can be more than mere wagering. Although it’s a bit similar in spirit, gamification is applicable to prediction markets, for example, Manifold is doing it pretty successfully (from my perspective as an active user, it’s quite addictive) although it hasn’t led to substantial user growth yet. Even the wagering itself can be different—you can bet “all on black” because you desperately need money and it’s your only chance, you can be drawn by the dopamine-driving experience of the slots, you can believe in your team and bet as kind of confirmation of your belief, you can make a bet to make watching the game more interesting. There are many aspects of gambling which have a wide appeal, and many of them are applicable to prediction markets.
Second, I am not sure it has to be a thing for the masses. In general, normies usually don’t have much valuable information, so why would we want them to participate? Of course, it will attract professionals who will correct mispricings and make money but ordinary people losing money is a negative externality which can even outweigh the positive ones.
I consider myself at least a semi-professional market participant. I bet on Manifold and use Metaculus a lot for a few years. I used Polymarket before but don’t do it anymore and resort to funny money ones despite they have problems (and of course can’t make me money).
Why I am not using Polymarket anymore:
As a real market should be, it’s far from trivial to make money on Polymarket. Despite that fact, I do (perhaps incorrectly) believe that my bets would be +EV. However, I don’t believe that I can be much better than random, so I don’t find it to be more profitable than investing in something else. However, if I could bet with “my favourite asset” it would become profitable for me (at least in my eyes, which is all that matters) and I would use it.
There are not enough interesting markets, mostly politics or sports. Which is mostly caused by the legal situation. Even Polymarket, a grey-area crypto-based market is very limited by that. PredictIt is even worse. Even if I am wrong here and it’s not the reason, still, there will be definitely more platforms which would experiment more if it was legal in the U.S.
The user experience is (or at least was) not great. Again, I believe it’s mostly caused by legal problems, it’s hard to raise money to improve your product if it’s not legal.
I do agree with your point, definitely “internalize the positive information externalities generated by them” is something which prediction markets should aspire to, an important (and interesting!) problem.
However, I don’t believe it’s essential for “making prediction markets sustainably large” unless we have a very different understanding of “sustainably large”. I am confident that it would be possible to achieve 1% of the global gambling market which would be billions of revenue and a lot of utility. It even seems to be a modest goal, given that it’s a serious instrument. But unfortunately, prediction markets are “basically regulated out of existence” :(
Sidenote on funny money market problems:
Metaculus’s problem is that it’s not a market at all. Perhaps it’s a correct decision but makes it boring, less competitive and less accurate (there are many caveats here, probably making Metaculus a market right now would make it less accurate, but from the highest-level perspective markets are a better mechanism).
Manifold’s problem is that serious markets draw serious people and unserious markets draw unserious people. As a result, serious markets are significantly more accurately priced which disincentivises competitive users to participate in them. That kinda defies the whole point. And also, perhaps even more importantly, users are not engaged enough (because they don’t have money at stake) so winning at Manifold is mostly information arbitrage which is tedious and unfulfilling.