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Prediction markets have an elections problem

asteriskmag.com

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Re: Prediction markets have an elections problem

#51

Post by chadash »

The answer is stupidly simple but only touched on briefly in the article. It is the fees and the limits bet sizes combined.

Let’s take a simple example, which is Donald Trump‘s current odds of winning the Republican nomination. Predictit currently has this at $0.92. Realistically I think the odds are higher. Not 100% but higher than $0.92. The problem is that the maximum I can bet is $500, so that’s 543 “shares” that I can buy. And I’ll make $0.08 on each share if he wins, so that’s $43. Then when I withdraw my money I will get a 5% fee, so my initial $500 turns in to $516. Oh, and then I have to wait until primaries, and for it to actually pay out. And there IS a non zero chance trump loses. Very few individuals will care about turning $500 into $515, so this bet makes sense. And since you have a cap on bet size, no institution will care either.

sounds like a rational market to me.

Re: Prediction markets have an elections problem

#52

Post by bmer »

fulladder wrote: post #35

The author does not understand bid-ask spreads, does not understand distortions created by fees, does not understand that the last trade price is not the same as what you can get at present, and just generally does not understand the realities of trading in markets. This article is a zero-information void.

Any resources that you'd recommend for learning such things?

Re: Prediction markets have an elections problem

#53

Post by j_maffe »

fulladder wrote: post #35

The author does not understand bid-ask spreads, does not understand distortions created by fees, does not understand that the last trade price is not the same as what you can get at present, and just generally does not understand the realities of trading in markets. This article is a zero-information void.

The article shows that the average predicted likelihood is frequently illogical. That is not zero-information.

Re: Prediction markets have an elections problem

#54

Post by teraflop »

Powdering7082 wrote: post #29

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.

The one and only time I traded on PredictIt, around the beginning of the pandemic, I made an easy couple hundred bucks on this market: https://www.predictit.org/markets/detail/4683

The majority of traders seemingly looked at the headline and failed to understand the contract terms, which only required a "quarterly annualized" GDP growth of 5%, during at least one quarter of 2020. So a severe economic downturn in Q2, followed by even a modest recovery in Q3, would have made a "yes" outcome all but guaranteed.

The comments became pretty hilarious once someone pointed this out.

Re: Prediction markets have an elections problem

#55

Post by jldugger »

bmer wrote: post #52
fulladder wrote: post #35

The author does not understand bid-ask spreads, does not understand distortions created by fees, does not understand that the last trade price is not the same as what you can get at present, and just generally does not understand the realities of trading in markets. This article is a zero-information void.

Any resources that you'd recommend for learning such things?

Business school[1]? Trading on IEM[2] for six months?

[1]: https://oyc.yale.edu/economics/econ-252 [2]: https://iem.uiowa.edu/iem/

Re: Prediction markets have an elections problem

#56

Post by paulcole »

Haralabob Voulgaris is a pretty well known NBA (basketball) gambler. He has talked about how his biggest lifetime score ever was betting Biden after it was clear Biden was going to win but before the race was called.

He talked about it on Bill Simmons Podcast and was just incredulous at how people could be that stupid and how much money had made betting on something that was a stone cold lock.

Re: Prediction markets have an elections problem

#57

Post by FergusArgyll »

chadash wrote: post #51

The answer is stupidly simple but only touched on briefly in the article. It is the fees and the limits bet sizes combined. Let’s take a simple example, which is Donald Trump‘s current odds of winning the Republican nomination. Predictit currently has this at $0.92. Realistically I think the odds are higher. Not 100% but higher than $0.92. The problem is that the maximum I can bet is $500, so that’s 543 “shares” that…

+ Opportunity costs

Re: Prediction markets have an elections problem

#58

Post by eli »

j_maffe wrote: post #53
fulladder wrote: post #35

The author does not understand bid-ask spreads, does not understand distortions created by fees, does not understand that the last trade price is not the same as what you can get at present, and just generally does not understand the realities of trading in markets. This article is a zero-information void.

The article shows that the average predicted likelihood is frequently illogical. That is not zero-information.

But those things at least partly explain the apparent irrationality.

PredictIt charges 10% fee on profits and another 5% fee on withdrawals. So bets that have the potential to earn a few cents on the dollar aren't necessarily worth it. That's before considering how long you have to lock up your money in this contract.

Re: Prediction markets have an elections problem

#59

Post by alphazard »

sctb wrote: post #42
alphazard wrote: post #23

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…

I find this interesting but I'm not sure I understand and I'd like to. Are you suggesting that there is a psychological aversion to prediction markets when the outcomes in question are as personal as politics? Would a similar analogy be, say, reluctance to the idea of finding one's romantic partner through a formalized process like algorithmic matchmaking?

What I have observed is: people calling these markets or their participants stupid. Then when they are told they can make money off of these supposedly stupid market participants, another made up reason is given why they won't put their money where their mouth is.

If the algorithms for finding romantic partners are similar to netflix recommendations, then I think the aversion to them is totally warranted; I don't think that's the same thing. If a closed source algorithm makes bad recommendations, I can dismiss it as useless. If I don't like the price of a prediction market, I am forced to reconcile what I know about the structure of the market, with my personal beliefs.

Anytime these markets come up in conversation or are used in a thought experiment, it reveals how few of an individual's outwardly professed beliefs they themselves take seriously. It's almost like most of the time someone says they believe something they are actually trying to manipulate anyone listening, rather than solicit criticism to refine the belief.

Re: Prediction markets have an elections problem

#60

Post by hipadev23 »

alephnerd wrote: post #50
tqi wrote: post #43

Earlier quoted context omitted.

> 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. Is there academic research on this by any chance? Recently I've been wondering if there is a similar issue…

> Is there academic research on this by any chance Read "Secrets of Sand Hill Road". It's written by Scott Kupor - one of the Managing Partner at A16Z - and explains in depth how the VC model works. It's also required reading if you want to interview at a VC fund, and highly recommended by other founders to learn how to better strategize when raising funds. Secrets of Sand Hill Road, Monetizing Innovation, and Workin…

Working Backwards, the Amazon book, or something else?
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