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Prediction markets have an elections problem

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Re: Prediction markets have an elections problem

#181

Post by efitz »

nelox wrote: post #69
efitz wrote: post #65

The example the author gives is the 2020 election. Without rehashing anything or endorsing anyone’s viewpoint, there were lots of issues being raised, lots of court cases in flight, and possible procedural issues in the states and in the Congress related to electors and certification. The election wasn’t “over” until certification happened (late) on January 6. Why should bettors be prohibited from continuing to bet?…

Elections should be perceived to be conducted in a fair and impartial manner as well as actually be conducted fairly and impartially. Therefore, betting on elections should be banned because an incentive is created to rig the outcome.

Elections are about power; there could hardly be a bigger motivator to rig the outcome even in the absence of any external factor like betting markets.

Re: Prediction markets have an elections problem

#182

Post by aleph_minus_one »

kqr wrote: post #148
aleph_minus_one wrote: post #114

Earlier quoted context omitted.

> There's no problem here at all; except perhaps the wildly absurd fantasy of "perfectly rational (and/or intelligent) markets," which the popularity of e.g. lotteries and casinos immediately disproves. Not much to see here. The behaviour of customers of lotteries is indeed clearly not perfectly rational if you consider the monetary expected value of your wins. On the other hand, the customers' behaviour gets much mo…

I have heard this argument before but I don't get it. Especially since evidence seems to show people generally have concave utility for money. (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies.) What is the exact shape of the convex utility function you theorise these people have? And what data supports that?

> (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies.

Indemnity insurance and lotteries are actually symmetric to each other: indemnity insure is about preventing big losses in a rare event, and lotteries are about winning big in a rare event.

The central difference is that the behaviour of people with respect to wins and losses is not symmetric, that is why insurance policies and lotteries are marketed quite differently.

> What is the exact shape of the convex utility function you theorise these people have? And what data supports that?

I am very sure that big lottery companies have data available to answer this question, but they won't make the data available. So I honestly admit that I don't know the answer, but I can propose an experiment how one might get a partial answer:

Create some lottery offers, paying out, say, 1000, 10.000, 100.000, 1.000.000, 10.000.000 $ with probabilities such that the expected payout is 5 $ for each of them. Now sell/auction the lottery tickets and look what prices customers are willing to pay. This should give a rough idea how the utility function might look like.

Re: Prediction markets have an elections problem

#183

Post by kqr »

aleph_minus_one wrote: post #182
kqr wrote: post #148

Earlier quoted context omitted.

I have heard this argument before but I don't get it. Especially since evidence seems to show people generally have concave utility for money. (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies.) What is the exact shape of the convex utility function you theorise these people have? And what data supports that?

> (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies. Indemnity insurance and lotteries are actually symmetric to each other: indemnity insure is about preventing big losses in a rare event, and lotteries are about winning big in a rare event. The central difference is that the behaviour of people with respect to w…

You mean the expected payout is -$5, right? Otherwise the rational person with decent means -- even with a very concave utility -- would pay near $5 for that ticket, and this would be a Kelly-correct investment.

The discussion was specifically about negative-EV lotteries since those are the ones that require convex utility.

Re: Prediction markets have an elections problem

#184

Post by aleph_minus_one »

kqr wrote: post #183
aleph_minus_one wrote: post #182

Earlier quoted context omitted.

> (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies. Indemnity insurance and lotteries are actually symmetric to each other: indemnity insure is about preventing big losses in a rare event, and lotteries are about winning big in a rare event. The central difference is that the behaviour of people with respect to w…

You mean the expected payout is -$5, right? Otherwise the rational person with decent means -- even with a very concave utility -- would pay near $5 for that ticket, and this would be a Kelly-correct investment. The discussion was specifically about negative-EV lotteries since those are the ones that require convex utility.

> You mean the expected payout is -$5, right?

No, 5$. The reason is that you sell/auction these lottery tickets. The price that the customer pays has to be subtracted from this payout (and this way the final payout very likely will become negative). But the price that the customer will pay in this experiment is not known beforehand, so the initial payout has to be positive.

Re: Prediction markets have an elections problem

#185

Post by dustypotato »

kwar13 wrote: post #164

There are all sorts of anomalies. Here is a trade I did from the last US presidential election. https://kavehtehrani.medium.com/free-money-on-inauguration-d...

Curious. How profitable was this for you? I assume the transaction fees ate a lot of it

Re: Prediction markets have an elections problem

#186

Post by HDThoreaun »

brlewis wrote: post #145
HDThoreaun wrote: post #140

Earlier quoted context omitted.

Lotteries are rational when you consider the entertainment value. Most lottery players dont expect to win, but as long as theres the possibility it allows them to daydream about what they would do if they did.

Citation please. Rational entertainment would predict poorer people playing the lottery less than rich people, which afaik is not how it happens.

The prospect of becoming rich isn’t as enticing when you’re already rich. What would a rich person who wins the lottery do? Quit their job I guess but mostly quality of life unchanged. They already have most of what they want. Not the case for poor people.

Re: Prediction markets have an elections problem

#187

Post by hobs »

kqr wrote: post #149
hobs wrote: post #128

Earlier quoted context omitted.

It's not that far away, they already sell insurance for this problem.

Do you have a link? This is something I've wanted.

Huh, I swear Delta offered me something that would give me like 50 bucks back if it was a rainy day but I see it nowhere on the internet so maybe it was a dream!

Re: Prediction markets have an elections problem

#188

Post by winstonewert »

An important aspect of this is that it's not legal for most people to run a prediction market. PredictIt is allowed to operate because it is run by a university, and even that is now under question. The result is that there is little competition in this space, which is why PredictIt has huge fees and limits. As others have pointed out, that's a big part of why these markets deviate from reality.

Re: Prediction markets have an elections problem

#189

Post by kqr »

aleph_minus_one wrote: post #184
kqr wrote: post #183

Earlier quoted context omitted.

You mean the expected payout is -$5, right? Otherwise the rational person with decent means -- even with a very concave utility -- would pay near $5 for that ticket, and this would be a Kelly-correct investment. The discussion was specifically about negative-EV lotteries since those are the ones that require convex utility.

> You mean the expected payout is -$5, right? No, 5$. The reason is that you sell/auction these lottery tickets. The price that the customer pays has to be subtracted from this payout (and this way the final payout very likely will become negative). But the price that the customer will pay in this experiment is not known beforehand, so the initial payout has to be positive.

Right, I'm dumb. Yeah, that sounds like a very exciting experiment! Now I just have to find someone to fund it...

Re: Prediction markets have an elections problem

#190

Post by brlewis »

kqr wrote: post #147
brlewis wrote: post #145

Earlier quoted context omitted.

Citation please. Rational entertainment would predict poorer people playing the lottery less than rich people, which afaik is not how it happens.

Lotteries are a comparatively cheap form of entertainment. Rich people can go to tennis matches, get a pilot's licence, and buy stock options. Poor people have much fewer alternatives.

$412/year doesn't seem that cheep to me. I think the less educated are being fooled into chasing extreme low-probability prizes.

https://bigthink.com/the-present/poor-americans-lottery/

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