Re: concerns about bad incentives, I agree that you can depict the losses associated with manipulating conditional prediction markets as paying a “cost” — even though you’ll probably lose a boatload of money, it might be worth it to lose a boatload of money to manipulate the markets. In the words of Scott Alexander, though:
If you’re wondering why people aren’t going to get an advantage in the economy by committing horrible crimes, the answer is probably the same combination of laws, ethics, and reputational concerns that works everywhere else.
I’m concerned about this, but it feels like a solvable problem.
Re: personal stuff & the negative externalities of publicly revealing probabilities, thanks for pointing these out. I hadn’t thought of it. Added it to the post!
So I’ve been thinking a little more about the real-world-incentives problem, and I still suspect that there are situations in which rules won’t solve this. Suppose there’s a prediction market question with a real-world outcome tied to the resulting market probability (i.e. a relevant actor says “I will do XYZ if the prediction market says ABC”). Let’s say the prediction market participants’ objective functions are of the form play_money_reward + real_world_outcome_reward. If there are just a couple people for whom real_world_outcome_reward is at least as significant as play_money_reward and if you can reliably identify those people (i.e. if you can reliably identify the people with a meaningful conflict of interest), then you can create rules preventing those people from betting on the prediction market.
However, I think that there are some questions where the number of people with real-world incentives is large and/or it’s difficult to identify those people with rules. For example, suppose a sports team is trying to determine whether to hire a star player and they create a prediction market for whether the star athlete will achieve X performance if hired. There could be millions of fans of that athlete all over the world who would be willing to waste a little prediction market money to see that player get hired. It’s difficult to predict who those people are without massive privacy violations—in particular, they have no publicly verifiable connection to the entities named in the prediction market.
Thanks for the response!
Re: concerns about bad incentives, I agree that you can depict the losses associated with manipulating conditional prediction markets as paying a “cost” — even though you’ll probably lose a boatload of money, it might be worth it to lose a boatload of money to manipulate the markets. In the words of Scott Alexander, though:
I’m concerned about this, but it feels like a solvable problem.
Re: personal stuff & the negative externalities of publicly revealing probabilities, thanks for pointing these out. I hadn’t thought of it. Added it to the post!
So I’ve been thinking a little more about the real-world-incentives problem, and I still suspect that there are situations in which rules won’t solve this. Suppose there’s a prediction market question with a real-world outcome tied to the resulting market probability (i.e. a relevant actor says “I will do XYZ if the prediction market says ABC”). Let’s say the prediction market participants’ objective functions are of the form play_money_reward + real_world_outcome_reward. If there are just a couple people for whom real_world_outcome_reward is at least as significant as play_money_reward and if you can reliably identify those people (i.e. if you can reliably identify the people with a meaningful conflict of interest), then you can create rules preventing those people from betting on the prediction market.
However, I think that there are some questions where the number of people with real-world incentives is large and/or it’s difficult to identify those people with rules. For example, suppose a sports team is trying to determine whether to hire a star player and they create a prediction market for whether the star athlete will achieve X performance if hired. There could be millions of fans of that athlete all over the world who would be willing to waste a little prediction market money to see that player get hired. It’s difficult to predict who those people are without massive privacy violations—in particular, they have no publicly verifiable connection to the entities named in the prediction market.