There are simply too many irrational people with money, and as soon as it became popular to participate in prediction markets, the way it currently is to participate in the stock market, they will add huge amounts of noise.
The conventional reply is that noise traders improve markets by making rational prediction more profitable. This is almost certainly true for short-term noise, and my guess is that it’s false for long-term noise, i.e., if prices revert in a day, noise traders improve a market, if prices take ten years to revert, the rational money seeks shorter-term gains. Prediction markets may be expected to do better because they have a definite, known date on which the dumb money loses—you can stay solvent longer than the market stays irrational.
Down-voted for semi-agreement.
There are simply too many irrational people with money, and as soon as it became popular to participate in prediction markets, the way it currently is to participate in the stock market, they will add huge amounts of noise.
The conventional reply is that noise traders improve markets by making rational prediction more profitable. This is almost certainly true for short-term noise, and my guess is that it’s false for long-term noise, i.e., if prices revert in a day, noise traders improve a market, if prices take ten years to revert, the rational money seeks shorter-term gains. Prediction markets may be expected to do better because they have a definite, known date on which the dumb money loses—you can stay solvent longer than the market stays irrational.