I think so. It’s kind of a made-up example because so few people actually care whether you make a post, but say they did, and that you post somewhat rarely so 1% is a reasonable outside view. You can earn great returns by buying “will post” and then posting. And when you do, others will notice and buy it up, as you say. You’ll keep buying the “yes” side until you’re risk-neutral that something will prevent you from posting (because you’ve invested enough that you’re uncomfortable, or the price is at your true belief that you’ll post).
If it gets to 99.9%, you STILL can’t make a profit by switching sides—you’re too heavily invested on the “yes”.
So the market ends up correct—very high probability of a post.
If it gets to 99.9%, you STILL can’t make a profit by switching sides—you’re too heavily invested on the “yes”.
Why not? If you sell your yes shares, that seems like a guaranteed profit to me? Are you assuming very large transaction costs or something?
Like let’s make it dead-simple:
The market sells contracts that pay $100 if you make the post, and pay nothing otherwise.
Initially the market price is at $1. This means you can earn $99 by buying a contract and the making a post, which sounds like a cost-effective way of spending your time, so you buy a contract. This increases the price, maybe to $2, maybe to $50, depending on the liquidity. (It sounds like you prefer the high-liquidity limit?)
The market somehow finds out about your plan, maybe by watching the prices, maybe because you announced your intention on social media, maybe for some other reason, so they conclude that you will make the post and therefore bid up the contract to $99.
Now you could make the post and earn a total profit of $99. But you could also just sell the contract at the current market price, yielding a guaranteed profit of $98, which is less risky and requires less work.
It sounds you are saying that this story fails at step 4, because you are saying that one couldn’t make a profit in this circumstance due to being “too heavily invested on the “yes”″. But I don’t see how you’re too heavily invested in the yes; it’s true that you’ve got a “yes” contract, but you bought it at $1 and the market price is now $99, so you can sell it and make a profit of $99-$1=$98.
Actually, that is a fair example, and I have changed my opinion. Where there is actual control (not just asymmetrical information), prediction markets don’t work. This may generalize to prediction markets not working where prediction is impossible. For instance, betting on the flip of a biased coin won’t make good predictions unless some participants know the bias.
I don’t see how the example changes when you add liquidity. Could you clarify, e.g. by tracing out a modified example?
I think so. It’s kind of a made-up example because so few people actually care whether you make a post, but say they did, and that you post somewhat rarely so 1% is a reasonable outside view. You can earn great returns by buying “will post” and then posting. And when you do, others will notice and buy it up, as you say. You’ll keep buying the “yes” side until you’re risk-neutral that something will prevent you from posting (because you’ve invested enough that you’re uncomfortable, or the price is at your true belief that you’ll post).
If it gets to 99.9%, you STILL can’t make a profit by switching sides—you’re too heavily invested on the “yes”.
So the market ends up correct—very high probability of a post.
Why not? If you sell your yes shares, that seems like a guaranteed profit to me? Are you assuming very large transaction costs or something?
Like let’s make it dead-simple:
The market sells contracts that pay $100 if you make the post, and pay nothing otherwise.
Initially the market price is at $1. This means you can earn $99 by buying a contract and the making a post, which sounds like a cost-effective way of spending your time, so you buy a contract. This increases the price, maybe to $2, maybe to $50, depending on the liquidity. (It sounds like you prefer the high-liquidity limit?)
The market somehow finds out about your plan, maybe by watching the prices, maybe because you announced your intention on social media, maybe for some other reason, so they conclude that you will make the post and therefore bid up the contract to $99.
Now you could make the post and earn a total profit of $99. But you could also just sell the contract at the current market price, yielding a guaranteed profit of $98, which is less risky and requires less work.
It sounds you are saying that this story fails at step 4, because you are saying that one couldn’t make a profit in this circumstance due to being “too heavily invested on the “yes”″. But I don’t see how you’re too heavily invested in the yes; it’s true that you’ve got a “yes” contract, but you bought it at $1 and the market price is now $99, so you can sell it and make a profit of $99-$1=$98.
Actually, that is a fair example, and I have changed my opinion. Where there is actual control (not just asymmetrical information), prediction markets don’t work. This may generalize to prediction markets not working where prediction is impossible. For instance, betting on the flip of a biased coin won’t make good predictions unless some participants know the bias.