I’m highly dubious that prediction markets would fix all our problems by themselves. At the very least, we’d need to go through several generations of prediction markets to work out all the inevitable problems that would come up.
Which we can’t do, as you’ve pointed out, when they’re currently effectively illegal to experiment with.
Oh, for sure the first generation of prediction markets won’t be enough. However, market forces will automatically take care of iteratively improving prediction market platforms for us (where “us” = “people concerned about x-risk”), and all “we” need to do is push to make them legal.
As long as entrepreneurs are allowed to make money by building better prediction markets (+ adjacent services), they will.
Could you please list the likely points of failure in the narrative I posted? I’d like to debug it.
The failure mode that stands out to me is “the American voter simply doesn’t give a shit about what the prediction markets say”. In case of this failure mode, then thank God for China. (and El Salvador, and Vietnam, and Singapore, and …)
But I don’t think the median voter would be so indifferent. “Put your money where your mouth is” is common folk wisdom that everyone understands. Besides, if anyone can create a market for like $10, people could ask the markets questions like “Is my wife cheating on me?” and “What are the odds of my daughter getting into Harvard?”, which I expect people would, in fact, care about.
Regarding issues with your narrative (split into a separate comment):
Institutions are inherently conservative and don’t like to change. Any particular innovation is unlikely to transform society, and any particular story for how the future will turn out a particular way is unlikely to come to pass.
For correct forecasters to get very rich on prediction markets, either someone has to provide liquidity, or there have to be “suckers at the table”, i.e. people who invest money for irrational reasons. If it’s the former case, where is this money coming from? And if it’s the latter, why are those people spending money on your prediction market rather than a lottery or something?
Also, it takes a lot of time for the money to go from bad forecasters to good ones.
And the losers have incentives to lobby against prediction markets. Anti-gambling laws didn’t write themselves.
Prediction market forecasts are probabilistic. So what if a politician’s policy turns out badly, and the prediction market predicted that outcome at 90%? The politician will ignore the forecast unless forced to confront it (which requires the prediction markets to have already accumulated credibility and trust among voters—how did that happen?), in which case they can criticize it as far too pessimistic (“I lost a 1⁄10 chance, not a 9/10”), or claim sabotage (“someone bet against me and then sabotaged my policy”), or find one of a myriad other excuses.
Also, prediction markets will inevitably get caught in partisan crossfires. When the markets predict good outcomes for their side, a voter might consider themselves a truthseeking advocate of prediction markets, and if the markets predict bad outcomes for their pet policies, they’ll suddenly accuse the markets of bias or manipulation or favoring the other side.
Any particular innovation is unlikely to transform society, and any particular story for how the future will turn out a particular way is unlikely to come to pass.
True.
there have to be “suckers at the table”
There are plenty of suckers at the table in the realm of securities trading.
why are those people spending money on your prediction market rather than a lottery or something?
Because finance bros and tech bros know that Lotteries Are For Poor People, while Prediction Markets, much like day trading crypto, are the kind of thing that sigma males like them use to get rich at the expense of irrational suckers (who totally aren’t other guys exactly like them). If I recall correctly, high frequency trading is almost entirely zero-sum, and there’s plenty of energy behind it anyway.
it takes a lot of time for the money to go from bad forecasters to good ones.
the losers have incentives to lobby against prediction markets. Anti-gambling laws didn’t write themselves.
The same criticisms apply to regular securities trading. To be fair, there are plenty of losers who hate securities trading, and wish it was illegal.
So what if a politician’s policy turns out badly, and the prediction market predicted that outcome at 90%? The politician will ignore the forecast unless forced to confront it.
This is true. However, voters don’t choose policies directly, only their representatives. If the market expectation of a candidate’s overall performance is upstream of voting patterns, then those candidates are forced to optimize for those expectations.
Also, prediction markets will inevitably get caught in partisan crossfires.
Yes, they will.
if the markets predict bad outcomes for their pet policies, they’ll suddenly accuse the markets of bias or manipulation or favoring the other side.
The cool thing about prediction markets is that if you disagree with them, you can just bet against them and win money. Put up or shut up.
The cool thing about prediction markets is that if you disagree with them, you can just bet against them and win money. Put up or shut up.
Suppose, there is a prediction market for a question like:
“If Alice is elected president, will GDP grow more than 20% by the end of the next 4 years?”
Current bets are 10 to 1 against Alice succeeding if elected. I strongly disagree, so I would like to bet $5000 on Alice and win a lot of money. Alice does not end up being elected, the prediction market probably being largely responsible for this outcome. So, the outcome is unresolved, I’m angry and frustrated since I was not able to make money, nor got my preferred politician got elected, and I lost some opportunity cost due to those $5000 being committed to this bet for some time. So I vote against prediction markets next time since those are obviously an evil plot to keep Alice from becoming president and fixing things.
Maybe, this can be somehow amended if I could instead bet on the effects of some policy that Alice endorses and I find compelling, and it is possible to test this policy on a smaller scale, and we could allocate some money from this presumably large betting pool for actually testing it, and we could somehow guarantee that those who bet lots of money won’t be able to influence this test much. There are a lot of “ifs” here, and this seems to require way more than just legalized prediction markets. I don’t immediately see how legalizing prediction markets necessarily leads to incentives to legalize and make it possible to easily resolve something like that.
I lost some opportunity cost due to those $5000 being committed to this bet for some time.
I expect future iterations of prediction market platforms to allow your money to accrue interest over the course of longer-term bets.
So I vote against prediction markets next time since those are obviously an evil plot to keep Alice from becoming president.
You don’t have to convince the whole country. Not even close. As long as you get New Hampshire to legalize prediction markets, New Hampshire can tell the federal government to go fuck itself. Weed is still federally illegal, remember?
It hasn’t escaped the notice of forecasters that prediction markets aren’t free of issues. For instance, check Scott’s Mantic Mondays posts on ACX.
For one thing, while there are many issues (like legal ones) which currently impede popularity of prediction markets, it’s nevertheless the case that so far none of them has particularly caught on on a larger scale. Then there’s stuff like transaction costs making them less useful (if there are transaction costs of 5%, markets won’t drop below 5% or rise above 95%), resolution risk being a big problem (questions you can easily arbitrate are often not the ones you care about; but if you can’t arbitrate the ones you care about, you can’t make a prediction market for them), lack of liquidity (another way for a prediction market to flop is for it to experience no uptake by users), and so on.
None of these issues seem fundamentally unresolvable. But conversely, we cannot currently point at any existing prediction market and say that “if we legalize this market and scale it up, it will transform society”, or something.
As for market questions like “is my wife cheating on me”, I’m extremely dubious that even if you managed to get prediction markets legalized, those kinds of questions would be allowed.
As for market questions like “is my wife cheating on me”, I’m extremely dubious that even if you managed to get prediction markets legalized, those kinds of questions would be allowed.
This is actually already possible right now on https://manifold.markets/ Even though, the market uses play, instead of real money, but you get at least something..
Otherwise I completely agree with your critique of current prediction markets, and I agree that none of the issues seem fundamentally unresolvable. Actually, I’m currently starting a new project (funded by FTX Future Fund) which aims to do just that! Sorry for the shameless plug, but here is a description of the project, and while I’m at it, I’m looking for a cofounder ;)
I’m aware of Manifold Markets. The only reason the site can be lax with regards to which markets and resolution criteria it allows is precisely because it only uses play money.
I’m highly dubious that prediction markets would fix all our problems by themselves. At the very least, we’d need to go through several generations of prediction markets to work out all the inevitable problems that would come up.
Which we can’t do, as you’ve pointed out, when they’re currently effectively illegal to experiment with.
Oh, for sure the first generation of prediction markets won’t be enough. However, market forces will automatically take care of iteratively improving prediction market platforms for us (where “us” = “people concerned about x-risk”), and all “we” need to do is push to make them legal.
As long as entrepreneurs are allowed to make money by building better prediction markets (+ adjacent services), they will.
Could you please list the likely points of failure in the narrative I posted? I’d like to debug it.
The failure mode that stands out to me is “the American voter simply doesn’t give a shit about what the prediction markets say”. In case of this failure mode, then thank God for China. (and El Salvador, and Vietnam, and Singapore, and …)
But I don’t think the median voter would be so indifferent. “Put your money where your mouth is” is common folk wisdom that everyone understands. Besides, if anyone can create a market for like $10, people could ask the markets questions like “Is my wife cheating on me?” and “What are the odds of my daughter getting into Harvard?”, which I expect people would, in fact, care about.
Regarding issues with your narrative (split into a separate comment):
Institutions are inherently conservative and don’t like to change. Any particular innovation is unlikely to transform society, and any particular story for how the future will turn out a particular way is unlikely to come to pass.
For correct forecasters to get very rich on prediction markets, either someone has to provide liquidity, or there have to be “suckers at the table”, i.e. people who invest money for irrational reasons. If it’s the former case, where is this money coming from? And if it’s the latter, why are those people spending money on your prediction market rather than a lottery or something?
Also, it takes a lot of time for the money to go from bad forecasters to good ones.
And the losers have incentives to lobby against prediction markets. Anti-gambling laws didn’t write themselves.
Prediction market forecasts are probabilistic. So what if a politician’s policy turns out badly, and the prediction market predicted that outcome at 90%? The politician will ignore the forecast unless forced to confront it (which requires the prediction markets to have already accumulated credibility and trust among voters—how did that happen?), in which case they can criticize it as far too pessimistic (“I lost a 1⁄10 chance, not a 9/10”), or claim sabotage (“someone bet against me and then sabotaged my policy”), or find one of a myriad other excuses.
Also, prediction markets will inevitably get caught in partisan crossfires. When the markets predict good outcomes for their side, a voter might consider themselves a truthseeking advocate of prediction markets, and if the markets predict bad outcomes for their pet policies, they’ll suddenly accuse the markets of bias or manipulation or favoring the other side.
And so on.
True.
There are plenty of suckers at the table in the realm of securities trading.
Because finance bros and tech bros know that Lotteries Are For Poor People, while Prediction Markets, much like day trading crypto, are the kind of thing that sigma males like them use to get rich at the expense of irrational suckers (who totally aren’t other guys exactly like them). If I recall correctly, high frequency trading is almost entirely zero-sum, and there’s plenty of energy behind it anyway.
The same criticisms apply to regular securities trading. To be fair, there are plenty of losers who hate securities trading, and wish it was illegal.
This is true. However, voters don’t choose policies directly, only their representatives. If the market expectation of a candidate’s overall performance is upstream of voting patterns, then those candidates are forced to optimize for those expectations.
Yes, they will.
The cool thing about prediction markets is that if you disagree with them, you can just bet against them and win money. Put up or shut up.
Suppose, there is a prediction market for a question like:
“If Alice is elected president, will GDP grow more than 20% by the end of the next 4 years?”
Current bets are 10 to 1 against Alice succeeding if elected. I strongly disagree, so I would like to bet $5000 on Alice and win a lot of money. Alice does not end up being elected, the prediction market probably being largely responsible for this outcome. So, the outcome is unresolved, I’m angry and frustrated since I was not able to make money, nor got my preferred politician got elected, and I lost some opportunity cost due to those $5000 being committed to this bet for some time. So I vote against prediction markets next time since those are obviously an evil plot to keep Alice from becoming president and fixing things.
Maybe, this can be somehow amended if I could instead bet on the effects of some policy that Alice endorses and I find compelling, and it is possible to test this policy on a smaller scale, and we could allocate some money from this presumably large betting pool for actually testing it, and we could somehow guarantee that those who bet lots of money won’t be able to influence this test much. There are a lot of “ifs” here, and this seems to require way more than just legalized prediction markets. I don’t immediately see how legalizing prediction markets necessarily leads to incentives to legalize and make it possible to easily resolve something like that.
I expect future iterations of prediction market platforms to allow your money to accrue interest over the course of longer-term bets.
You don’t have to convince the whole country. Not even close. As long as you get New Hampshire to legalize prediction markets, New Hampshire can tell the federal government to go fuck itself. Weed is still federally illegal, remember?
It hasn’t escaped the notice of forecasters that prediction markets aren’t free of issues. For instance, check Scott’s Mantic Mondays posts on ACX.
For one thing, while there are many issues (like legal ones) which currently impede popularity of prediction markets, it’s nevertheless the case that so far none of them has particularly caught on on a larger scale. Then there’s stuff like transaction costs making them less useful (if there are transaction costs of 5%, markets won’t drop below 5% or rise above 95%), resolution risk being a big problem (questions you can easily arbitrate are often not the ones you care about; but if you can’t arbitrate the ones you care about, you can’t make a prediction market for them), lack of liquidity (another way for a prediction market to flop is for it to experience no uptake by users), and so on.
None of these issues seem fundamentally unresolvable. But conversely, we cannot currently point at any existing prediction market and say that “if we legalize this market and scale it up, it will transform society”, or something.
As for market questions like “is my wife cheating on me”, I’m extremely dubious that even if you managed to get prediction markets legalized, those kinds of questions would be allowed.
This is actually already possible right now on https://manifold.markets/ Even though, the market uses play, instead of real money, but you get at least something..
Otherwise I completely agree with your critique of current prediction markets, and I agree that none of the issues seem fundamentally unresolvable. Actually, I’m currently starting a new project (funded by FTX Future Fund) which aims to do just that! Sorry for the shameless plug, but here is a description of the project, and while I’m at it, I’m looking for a cofounder ;)
I’m aware of Manifold Markets. The only reason the site can be lax with regards to which markets and resolution criteria it allows is precisely because it only uses play money.