I wonder how much of the activity on prediction markets these days is competing LLM scripts? I would guess the overlap in prediction market punters and AI boomers is high.
The microstructure of wealth transfer in prediction markets
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Re: The microstructure of wealth transfer in prediction markets
#12How do prediction markets account for interest rates? I feel like I should be willing to pay no more than ~96 cents for a contract that will definitely resolve to a dollar in a year. Who puts up the other 4 cents?
The usual thing is that the market ends up around $0.95 for things like that, if the actors are all solid investors. It only takes one overly enthusiastic yes buyer to break that ceiling, the smart money won't "correct" it down to $0.95
There's another idea, which is make contacts that pay out in shares of an ETF, but I haven't seen this idea put into practice
Re: The microstructure of wealth transfer in prediction markets
#13How do prediction markets account for interest rates? I feel like I should be willing to pay no more than ~96 cents for a contract that will definitely resolve to a dollar in a year. Who puts up the other 4 cents?
The usual thing is that the market ends up around $0.95 for things like that, if the actors are all solid investors. It only takes one overly enthusiastic yes buyer to break that ceiling, the smart money won't "correct" it down to $0.95 There's another idea, which is make contacts that pay out in shares of an ETF, but I haven't seen this idea put into practice
that's correct. Also Kalshi does pay out interest on, and Poly does on a few markets
Re: The microstructure of wealth transfer in prediction markets
#14This article lacks even the most basic understanding of probability and statistics. Slot machines "93 cents on the dollar" return is a statistical certainty of 7% loss. You are playing a repeated game which by the law of large numbers will converge to the 93% probability.
In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run.
Slots are also unskilled games, prediction markets clearly some participants have a clear market edge, thus not efficiently priced.
Re: The microstructure of wealth transfer in prediction markets
#15tl;dr dataset: 72.1m trades and $18.26b volume on kalshi (2021-2025) core findings: longshot bias: well documented longshot bias is present on kalshi. low probability contracts are systematically overpriced. contracts trading at 5 cents only win 4.18% of the time. wealth transfer: liquidity takers lose money (-1.12% excess return) while liquidity makers earn it (+1.12%). optimism tax: the losses are driven by a prefe…
This reminds me of the old scheme where if you just bet against ND football you'd make money because ND fans were so rabid that the "ND is good" positions became overpriced.
Yes, in the study they pinpointed this beautifully:
“A fan betting on their team to win the championship is not calculating expected value; they are purchasing hope.”
Re: The microstructure of wealth transfer in prediction markets
#16I wonder how much of the activity on prediction markets these days is competing LLM scripts? I would guess the overlap in prediction market punters and AI boomers is high.
It'd be a good way to lose money at the moment. Probably not too far off in the future it would make sense though
Re: The microstructure of wealth transfer in prediction markets
#17How do prediction markets account for interest rates? I feel like I should be willing to pay no more than ~96 cents for a contract that will definitely resolve to a dollar in a year. Who puts up the other 4 cents?
Kalshi pays interest on open positions
Re: The microstructure of wealth transfer in prediction markets
#18This article lacks even the most basic understanding of probability and statistics. Slot machines "93 cents on the dollar" return is a statistical certainty of 7% loss. You are playing a repeated game which by the law of large numbers will converge to the 93% probability. In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. Slot…
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Re: The microstructure of wealth transfer in prediction markets
#19This article lacks even the most basic understanding of probability and statistics. Slot machines "93 cents on the dollar" return is a statistical certainty of 7% loss. You are playing a repeated game which by the law of large numbers will converge to the 93% probability. In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. Slot…
> In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run.
This is basically equivalent to the observation that, in a perfectly efficient market, no entity can ever make a profit.
And yet, in the real world, entities make profits all the time. In fact, they make wild, unimaginable, world-changing, history-altering profits. This is a tacit admission that our markets aren't even remotely efficient, and that includes predictions markets. Efficient, rational markets are the exception, not the rule.
Re: The microstructure of wealth transfer in prediction markets
#20I'm getting some really skeezy ads for prediction markets on TikTok at the moment, the message is effectively "hey, are you broke? earn $50+/day on Kalshi!"