Currently trying to understand why the LW community is largely pro-prediction markets.
Institutions and smart people with a lot of cash will invest money in what they think is undervalued, not necessarily in what they think is the best outcome. But now suddenly they have a huge interest in the “bad” outcome coming to pass.
To avoid (1), you would need to prevent people and institutions from investing large amounts of cash into prediction markets. But then EMH really can’t be assumed to hold
I’ve seen discussion of conditional prediction markets (if we do X then Y will happen). If a bad foreign actor can influence policy by making a large “bad investment” in such a market, such that they reap more rewards from the policy, they will likely do so. A necessary (but I’m not convinced sufficient) condition for this is to have a lot of money in these markets. But then see (1)
If we get to the point where prediction markets actually direct policy, then yes you need them to be very deep—which in at least some cases is expected to happen naturally or can be subsidized but you also want to make the decision based off a deeper analysis than just the resulting percentages—depth of market, analysis of unusual large trades, blocking bad actors etc.
This pacifies my apprehension in (3) somewhat, although I fear that politicians are (probably intentionally) stupid when it comes to interpreting data for the sake of pushing policies
To add: this seems like the kind of interesting game theory problem I would expect to see some serious work on from members in this community. If there is such a paper, I’d like to see it!
Prediction markets are low volume speculative markets whose prices offer informative forecasts on particular policy topics. Observers worry that traders may attempt to mislead decision makers by manipulating prices. We adapt a Kyle-style market microstructure model to this case, adding a manipulator with an additional quadratic preference regarding the price. In this model, when other traders are uncertain about the manipulator’s target price, the mean target price has no effect on prices, and increases in the variance of the target price can increase average price accuracy, by increasing the returns to informed trading and thereby incentives for traders to become informed.
No, but it’s exactly what I was looking for, and surprisingly concise. I’ll see if I believe the inferences from the math involved when I take the time to go through it!
Currently trying to understand why the LW community is largely pro-prediction markets.
Institutions and smart people with a lot of cash will invest money in what they think is undervalued, not necessarily in what they think is the best outcome. But now suddenly they have a huge interest in the “bad” outcome coming to pass.
To avoid (1), you would need to prevent people and institutions from investing large amounts of cash into prediction markets. But then EMH really can’t be assumed to hold
I’ve seen discussion of conditional prediction markets (if we do X then Y will happen). If a bad foreign actor can influence policy by making a large “bad investment” in such a market, such that they reap more rewards from the policy, they will likely do so. A necessary (but I’m not convinced sufficient) condition for this is to have a lot of money in these markets. But then see (1)
If we get to the point where prediction markets actually direct policy, then yes you need them to be very deep—which in at least some cases is expected to happen naturally or can be subsidized but you also want to make the decision based off a deeper analysis than just the resulting percentages—depth of market, analysis of unusual large trades, blocking bad actors etc.
This pacifies my apprehension in (3) somewhat, although I fear that politicians are (probably intentionally) stupid when it comes to interpreting data for the sake of pushing policies
To add: this seems like the kind of interesting game theory problem I would expect to see some serious work on from members in this community. If there is such a paper, I’d like to see it!
A bit dated but have you read Robin’s 2007 paper on the subject?
No, but it’s exactly what I was looking for, and surprisingly concise. I’ll see if I believe the inferences from the math involved when I take the time to go through it!