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I always assumed prediction markets weren't popular because they are frequently shutdown by governments. The authors disagree explicitly:
The explanation usually put forward by proponents is simply that these omniscient markets are unfortunate victims of broader prohibitions on gambling. If we could change these rules, we might know accurate probabilities of many more future events.
We disagree. Instead, our view is that prediction markets on everything – liquid markets over a wide range of important topics – will not work without subsidies. These subsidies would be expensive, so other forms of information aggregation are usually more attractive. The scarcity of prediction markets in the world today is not a failure of regulation, but a sign that they are much less promising than many advocates, including the authors of this piece, once hoped.
Their theory is that they don't have market-fit:
Rather than regulation, our explanation for the absence of widespread prediction markets is a straightforward demand-side story: there is little natural demand for prediction market contracts, as we observe in practice.
In their view, PMs mostly attract gamblers because other market participants, savers (wealth builders), aren't attracted to zero-sum games:
Prediction markets, unlike most asset markets, are zero-sum – in fact they are negative-sum, once you factor in platform fees. And if your money is in a prediction market, it can’t be invested in equities, or be earning interest in the bank, either.
And sharps, career market optimizers like hedge fundy people, won't be attracted to a market without the liquidity provided by savers:
But since prediction markets lack savers – who flood security markets with capital and create profit opportunities – this never happens. Prediction markets are orders of magnitude smaller than other financial markets.
They also conclude that even gamblers are weakly attracted to PMs because quick resolution is a key requirement for most gamblers and most PMs outside of sports have long resolutions:
Our view is that, for gamblers, quick resolutions are one of the key things that make a bet attractive and exciting. Sports betting sites’ futures bets on longer-term outcomes are far less traded than bets on single games about to happen, even when the future event (like the winner of the Super Bowl) is far higher-profile than tonight’s game.
In their own words:
Given these conditions, it is not a mystery why there aren’t more and larger prediction markets. Savers don’t want to go anywhere near them. Gamblers have more fun ways to chase their thrills. Sharps have no reason to enter the markets. We’re left with the small markets and wide spreads we find on Kalshi, PredictIt, and other prediction markets.
I have to code but they market-fit can be solved with some kind of subsidy. They even imply that without a subsidy, PMs are pricing information at $0:
Instead, we must recognize that good information about the future is costly to come by, and we must be willing to purchase or create incentives to elicit that information. There is no epistemic free lunch.
2671 sats \ 1 reply \ @mega_dreamer 6h
The explanation usually put forward by proponents is simply that these omniscient markets are unfortunate victims of broader prohibitions on gambling. If we could change these rules, we might know accurate probabilities of many more future events. We disagree. Instead, our view is that prediction markets on everything – liquid markets over a wide range of important topics – will not work without subsidies. These subsidies would be expensive, so other forms of information aggregation are usually more attractive. The scarcity of prediction markets in the world today is not a failure of regulation, but a sign that they are much less promising than many advocates, including the authors of this piece, once hoped.
The author's view is very one-sided. While, active prohibition up until Kalshi took it to the court, has negatively affected the perceptions of PM. Normies still associate it with gambling. Just like how initially Bitcoin was associated with drug and darkweb money - that perceptions still exists.
I agree with highly liquid markets over markets for everything. But, the author fails to understand that "markets on everything" has special purpose. It used to attract new users who can relate to normal stuff such as "Which song will be the Top of Spotify for this week?" Its like Costco's $1.50 hotdog. You go there for the hotdog but land-up buying more things.
Rather than regulation, our explanation for the absence of widespread prediction markets is a straightforward demand-side story: there is little natural demand for prediction market contracts, as we observe in practice.
Yes, there is demand problem as compared to gambling, because prediction market is not for everyone. The target audience of PM are the intellectuals, thinkers, economists, risk-hedgers etc. The target audience for gambling is totally opposite spectrum. Just like how the world will always have few software developers as compared to normal workers in construction, service industry etc, in the same way there only be fewer people will interested in PM. But these people who are actually interested in PM have more disposable income as compared to gamblers.
I run very large play-money markets on manifold, and so far most of the traders on my markets are people with similar profiles:
Prediction markets, unlike most asset markets, are zero-sum – in fact they are negative-sum, once you factor in platform fees. And if your money is in a prediction market, it can’t be invested in equities, or be earning interest in the bank, either.
Totally wrong! Kalshi offers interest. I think poly does that too. People are experimenting with loans on your positions, its actively being tested at manifold. Also Kalshi started marginal bets, similar to manifold's loan.
And, lastly the author fails to understand that PM are used heavily by hedgers and shorters.
A simple example:
Lets assume I run solar business. And I'm a hard-core democrat, I hate Trump. I know if Trump wins, he will cut solar subsidy, my business will incur $5M loss in the next 4 years due to Trump's policy changes.
If I'm a smart businessman, even though I hate Trump, I will bet $2.5M on Trump winning the elections at 50% odds so that I can make $5M on him winning. Thus I just reduced my loss by 50% over next 4 years.
All in all, PMs maybe not be best forecasting tool, but it has so many other benefits. Tarek founder of Kalshi truly believes that PMs are are future of financial markets, it will take over most of the margin trading from the traditional exchanges.
Need to get back to coding, I can write about it all day :)
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100 sats \ 0 replies \ @BlokchainB 6h
👏👏
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188 sats \ 0 replies \ @jimmysong 6h
The article just destroyed Paul Sztorc's Hivemind and in turn, Drivechains, not to mention all those altcoins that were focused on some platform for betting/gambling.
The article makes sense to me and I don't really see any substantial flaws in it. There is a way to subsidize using inflation that would motivate savers, but then that's essentially what the stock market and real estate are now. Anyway, nice find!
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Not that I disagree, but here are some potential counterarguments.
  1. Natural demand could come from hedgers and speculators.
    Prediction markets allow you to hedge against an outcome that would be detrimental to you. They also allow you to express a belief that you think is undervalued by the market (speculation, not gambling)
  2. Zero-sum is not a necessary condition.
    Especially for longer-run outcomes, the market maker could invest some of the proceeds and give a rate of return to the bettors. It will probably be less than other rates you could get, due to fees, but some would be willing to pay.
  3. Prediction markets could monetize data.
    The data generated by prediction markets, especially if the volume is large, could be very useful for many different people. Revenues generated from this data can be used to subsidize the betting markets themselves.
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I agree it attracts gamblers. My bets are coming from my gambling budget. I would never touch my cold sats for this. I'd argue that maybe bitcoin only prediction markets are less likely to succeed as there are more degen gamblers in the shitcoin world. But then we have ordinals, so maybe that's a wrong assumption.
I also agree with the fact i prefer short term markets. I don't like too much to lock away too many sats for the whole of 2025 for instance before a market resolves. Even if i can close my position before resolution. But i have some long term ones, so it really depends on the market.
I think the zero sum argument is only valid for completely efficient markets with high liquidity. I am particularly drawn to the markets where i can tilt the odds myself and benefit from some mispriced odds.
So i guess maybe as a real tool to predict the future, they are not as great as initially hoped or expected. But there is definitely a market for it. And some markets have been pretty good at predicting election outcomes, no? Even when traditional tools failed to predict the outcomes.
Instead, we must recognize that good information about the future is costly to come by, and we must be willing to purchase or create incentives to elicit that information. There is no epistemic free lunch.
Agree on this.
What say you, @mega_dreamer?
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Just put my thoughts in direct reply.
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I don't understand why prediction markets are being compared to anything else in terms of trading volume. Why would they need to have high volume?
If someone sees a speculative opportunity on some mispriced odds, it only takes their one trade to move the lines.
I suppose they could make all PM activity tax exempt. That would treat it like a public good.
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130 sats \ 1 reply \ @k00b OP 7h
Why would they need to have high volume?
High volume would mean they are popular, wouldn't it?
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I'm sure those two things are correlated, but why would stock trading volume be a point of comparison? I have no idea, a priori, what that relationship would be in an ideal situation.
The point of prediction markets is that they aggregate the available information. If the price moves to roughly what people think is the right level, then there won't be much further movement, even if interested potential speculators are looking at it. You'd expect lots of movement on something where there's a lot of disagreement about the likelihood.
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Arbitrage opportunities exist any time a trader perceives a difference that is suspect, no matter the size of the market. This speculation is just that, speculation, it is not investment or saving and, if the speculator knows very little about the field being speculated upon, it is called gambling. Many speculators do not like to hear it called gambling, but what else could you call it? Would that make Prediction Markets bookies, then?
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115 sats \ 2 replies \ @grayruby 10h
I thought they were popular. Polymarket, Kalshi and PredictIt got a ton of buzz and media around the election.
Maybe they are just for big events.
The idea that only being for gamblers means there is no product market fit seems odd. Gambling industry is massive and global.
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54 sats \ 1 reply \ @k00b OP 10h
All the activity is concentrated near the resolution:
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73 sats \ 0 replies \ @grayruby 10h
Yes that makes sense. They just need to have something every month for people to be hyped about betting on.
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Or perhaps, as Caplan’s colleague Robin Hanson proposed, we could design the structure of our government around the results of prediction markets. Right now, voters vote based on a combination of their empirical beliefs about how the world works and the moral values of political candidates. Instead, argues Hanson, we could use prediction markets to predict the outcomes of different policies and let people use these to vote on values grounds alone.
This one has been the subject of one of Frank Herbert’s books, The Dosadi Experiment. The results of the experiment were not pretty, in fact they were very horrible. One of the treatments in the experiment was to require the government to work on a democratic predictions market for all decisions by the populace. After reading the book several times, I wouldn’t wish this type of government on my worst enemy, because it is absolutely merciless on all aspects of running a populace, including Gates’ favorite depopulation.
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I've never participated in prediction markets. In the ones you're familiar with, is it possible to liquidate your position before the market closes? If not, I believe that would be a beneficial feature, comparable to Betfair. It's similar to day trading, providing more opportunities for short-term trading.
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100 sats \ 1 reply \ @BlokchainB 9h
@mega_dreamer thoughts?
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yes, put my thought on the direct reply.
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stackers have outlawed this. turn on wild west mode in your /settings to see outlawed content.