I’ve written a follow-up post on the mysterious Trump buyers on Polymarket. While mainstream media has extensively covered this story, it has overlooked some critical details—most notably, that this trader’s bet on Trump is closer to $75 million USDC, making it the largest election market wager to date. Regardless of the outcome, Theo is poised to go down in history as the most significant bettor in prediction markets.
… and the signifcance of the bets has been to show that prediction markets, at least as presently constituted, aren’t very useful for actually predicting events of any real significance. It’s too easy for whackos to move the market to completely insane prices that don’t reflect any realistic probability assessment. Being rich is definitely not incompatible with being irrational, and being inclined to gamble is probably negatively correlated with being well calibrated.
The promise of prediction markets was that they are either useful or allow you to take money from rich idiots. I’d say that was fulfilled.
Also, useful is very different from perfect. They are still very adequate for a large variety of questions.
You’ve gotten a fair number of disagree-votes thus far, but I think it’s generally correct to say that many (arguably most) prediction markets still currently lack the trading volume necessary to justify confidence that EMH-style arguments mean inefficiencies will be rapidly corrected. To a large extent, it’s fair to say this is due to over-regulation and attempts at outright banning (perhaps the relatively recent 5th Circuit ruling in favor of PredictIt against the Commodities Future Trading Commission is worth looking at as a microcosm of how these legal battles are playing out in today’s day and age).
Nevertheless, the standard theoretical argument that inefficiencies in prediction markets are exploitable and thus lead to a self-correcting mechanism still seems entirely correct, as Garrett Baker points out.
Your comment would have more validity had the market not corrected the dislocation created by Theo. It took three weeks, but the market eventually corrected itself.
Another way to look at that is that during a relatively long stretch of time when people most needed an advance prediction, the market was out of whack, it got even more out of whack as the event approached, and a couple of days before the final resolution, it partially corrected. The headline question is sitting at 59.7 to 40.5 as I write this, and that’s still way of line with every other prediction source.
Can’t this only be judged in retrospect, and over a decent sample size? If all the markets did was reflect the public expert consensus, they wouldn’t be very useful; the possibility that they’re doing significantly better is still open.
(I’m assuming that by “every other prediction source” you mean everything other than prediction/betting markets, because it sounds like Polymarket is no longer out of line with the other markets. Betfair is the one I keep an eye on, and that’s at 60⁄40 too.)
The model that makes you hope for accuracy from the market is that it aggregates the information, including non-public information, available to a large number of people who are doing their best to maximize profits in a reasonable VNM-ish rational way.
In this case, everybody seems pretty sure that the price is where it is because of the actions of a single person who’s dumped in a very large amount of money relative to the float. It seems likely that that person has done this despite having no access to any important non-public information about the actual election. For one thing, they’ve said that they’re dumping all of their liquidity into bets on Trump. Not just all the money they already have allocated to semi-recreational betting, or even all the money they have allocated to speculative long shots in general, but their entire personal liquidity. That suggests a degree of certainty that almost no plausible non-public information could actually justify.
Not only that, but apparently they’ve done it in a way calculated to maximally move the price, which is the opposite of what you’d expect a profit maximizer to want to do given their ongoing buying and their (I think) stated and (definitely at this point) evidenced intention to hold until the market resolves.
If the model is that makes you expect accuracy to begin with is known to be violated, it seems reasonable to assume that the market is out of whack.
Sure, it’s possible that the market just happens to be giving an accurate probability for some reason unrelated to how it’s “supposed” to work, but that sort of speculation would take a lot of evidence to establish confidently.
Well, yes. I would expect that if you successfully mess up Polymarket, you have actually messed up “The Betting Market” as a whole. If there’s a large spread between any two specific operators, that really is free money for somebody, especially if that person is already set up to deal on both.
I think it’s clear that he’s the reason the price blew out so dramatically. But it’s not clear why the market didn’t ‘correct’ all the way back (or at least much closer) to 50⁄50. Thirty million dollars is a lot of money, but there are plenty of smart rich people who don’t mind taking risks. So, once the identity and (apparent) motives of the Trump whale were revealed, why didn’t a handful of them mop up the free EV?
That’s not a rhetorical question; I’m interested in your answer and might be convinced by it. But right now I don’t see sufficient reason to be confident that the market is still badly distorted, rather than having legitimately settled on ~60/40.
Well, first I think you’re right to say “a handful”. My (limited but nonzero) experience of “sufficiently rich” people who made their money in “normal” ways, as opposed to by speculating on crypto or whatever, is that they’re too busy to invest a lot of time in playing this kind of market personally, especially if they have to pay enough attention to play it intelligently. They’re not very likely to employ anybody else to play for them either. Many or most of them will see as the whole thing as basically an arcane, maybe somewhat disreputable game. So the available pool is likely smaller than you might think.
That conjecture is at least to some degree supported by the fact that nobody, or not enough people, stepped in when the whole thing started. Nothing prevented the market from moving so far to begin with. It may not have been as certain what was going on then, but things looked weird enough that you’d expect a fair number of people to decide that crazy money was likely at work, and step in to try to take some of it… if enough such people were actually available.
In any case, whether when the whole thing started, after public understanding was reasonably complete, or anywhere along the way, the way I think you’d like to make your profit on the market being miscalibrated would be to buy in, wait for the correction, and then sell out… before the question resolved and before unrelated new information came in to move the price in some other way.
But would be hard to do that. All this is happening potentially very close to resolution time, or at least to functional resolution time. The market is obviously thin enough that single traders can move it, and new information is coming in all the time, and the already-priced-in old information isn’t very strong and therefore can’t be expected to “hold” the price very solidly, and you have to worry about who may be competing with you to take the same value, and you may be questioning how rational traders in general are[1].
So you can’t be sure you’ll get your correction in time to sell out; you have a really good chance of being stuck holding hold your position through resolution. If “markets can remain irrational longer than you can remain solvent”, then they can also stay irrational for long enough that trading becomes moot.
If you have to hold through resolution, then you do still believe you have positive expected value, but it’s really uncertain expected value. After all, you believe the underlying question is 50-50, even if one of those 50s would pay you more than the other would lose you. And you have at best limited chance to hedge. So you have to have risk tolerance high enough that, for most people, it’d be in the “recreational gambling” range rather than the “uncertain investment” range. The amount of money that any given (sane) person wants to put at risk definitely goes down under that much uncertainty, and probably goes down a lot. So you start to need more than a “handful” of people.
Also, don’t forget the point somebody made the other day about taxes. Unless you’re a regular who plays many different questions in such volume that you expect to offset your winnings with losses, you’re going to stand to “win” a double-digit percentage less than you stand to “lose”, whether on selling off your position or on collecting after resolution. Correcting 60-40 to 50-50 may just plain not be profitable even if you collect.
There are probably other sources of friction, too.
I’d bet at least a recreational amount of money that players in betting markets are sharply more pro-Trump politically than, say, the general voting population, and that would be expected to skew their judgement, and therefore the market, unless almost all of them were superhuman or nearly so. And when you’re seeing the market so easily moved away from expert opinion…