That said, whenever these things become more “useful” I can’t help but worry that “information discovery” and “institutional hedging” act against each other. Ultimately if something becomes correlated to people’s view of the world, pricing becomes less about “forecasting” and more about “risk premium”. To take a concrete example, if there were NGDP futures, you should expect them to be biased low / you should earn a premium for being long GDP. Specifically because if GDP falls so will the rest of your assets, which makes it “painful” to hold—hence a premium to own it.
To give one further example of uses of prediction markets, Scott Sumner has the idea of using NGDP futures as a way to have market driven monetary policy.
That said, whenever these things become more “useful” I can’t help but worry that “information discovery” and “institutional hedging” act against each other. Ultimately if something becomes correlated to people’s view of the world, pricing becomes less about “forecasting” and more about “risk premium”. To take a concrete example, if there were NGDP futures, you should expect them to be biased low / you should earn a premium for being long GDP. Specifically because if GDP falls so will the rest of your assets, which makes it “painful” to hold—hence a premium to own it.