Prediction markets have an elections problem

I worked at a prediction market startup for a while.

Even completely rational prediction markets generally have a structural problem with events with likelihoods close to 1.0 or 0.0. This leads to cases where conspiracy type events have much higher likelihoods than they should, leading people to assume the market has lost all rationality when actually it hasn't.

For example, imagine if there's an event with a predicted likelihood of 1 in 50, but it should actually be 1 in 1000.

Assuming the market uses real money, then on paper someone should be able to make a roughly 2% return by betting that the event won't occur. However, if this market isn't closing for a while (for example for an election at the end of the year), then no-one is incentivised to take the bet and correct the market, because they'll get a much better risk free return just by putting their money in a term deposit and collecting the interesting. And so the market remains un-corrected. Basically prediction markets have an accuracy upper bound determined by the current risk free return.

For markets using "play" money a slightly different effect is at play. When it's not real money involved, generally the people are incentivised to try and top a leaderboard of some sort. In this case, a really effective strategy for people who currently aren't near the top of the leaderboard is to take long shot bets. If they loose, who cares they weren't gonna win anyways, but if the the bet plays off they have a lot to gain. Basically there's an asymmetry in returns that once again messes with probabilities.

It seems like there is a lot of resistance to these kinds of markets. Both in terms of bureaucratic restrictions, but also in terms of sentiment, including here on HN.

It's not that people disagree with the market clearing price, and are motivated to take a position. It's that they don't want other people to converge on a prediction in this way, and want to ban it, or keep the stakes so small that the market doesn't attract real expertise.

It's like people are more into beliefs as decoration, rather than as something to compare and test against other people's beliefs.

In the minds of conservatives and some leftists, the concept that Kamala being unpopular is so ingrained that they cannot believe that she would be the nominee no matter what the circumstances. In reality she's not much more unpopular than her President and would likely see a massive approval bump if the worst happens to the current POTUS.

Even without that, she's the odds-on favorite to be the nominee in 2028 by incumbency alone. Basically anyone that follows politics understands this, but the silly conspiracies are based on motivated reasoning.

Copying my comment from the dead zzzeek post:

Long shot bets are almost always overpriced on PredictIt.

PredictIt specifically encourages these long shots to be over weighted thanks to their $850 risk limit in any given market. If one long-shot bettor places a max buy order for YES at 10c per share, the order book has 8500 buys at that price point. I can come along, see that what they're betting on is absolutely nuts and max out NO... but at 90c per share I can only fill 944 of those orders before I'm maxed out at my $850 risk limit. I might be supremely confident and WANT to bet $7,650 on this but I simply am not allowed to. So it takes eight more people like me to come along and plunk that money down before we're moving the needle on the order book.

In the 2020 election they somewhat mitigated this by making a dozen markets that were all basically the same question: Is Trump going to succeed at overturning this? They had markets for each state, plus combo markets they added like "Will Trump win any of AZ, GA, PA", plus the electoral college markets, the margin-of-victory markets, etc. But it was still way more effort to go in with a big chunk of change and manage spreading your bets out across all those different markets to max your $850 caps as efficiently as possible.

This is in addition to the other factors, that it is simply more FUN for people to gamble on long odds because it's like buying lottery tickets (who wouldn't want a 10:1 return?). And that, when you factor in fees, opportunity cost (I could have this money in the S&P 500), and counterparty risk (how long will my money be tied up if PredictIt gets shut down), it's really not very attractive to put money in shares in the $0.90-0.99 range unless A. you already have the cash sitting in your PredictIt balance and B. the end date of the market is known and approaching rapidly.

I made pretty good returns (e.g. 40% annualized) during the 2020 election on predictit.

I even found a pure arbitrage opportunity.

But you can't really scale up to make it worthwhile on PredictIt due to bet size limitations.