(This shortform was inspired by the following question from Daniel Murfet: Can you elaborate on why I should care about Kelly betting? I guess I’m looking for an answer of the form “the market is a dynamical process that computes a probability distribution, perhaps the Bayesian posterior, and because of out of equilibrium effects or time lags or X, the information you derive from the market is not the Bayesian posterior and therefore you should bet somehow differently in a way that reflects that”?)
Timing the Market
Those with experience with financial markets know that knowing whether something will happen is only half the game—knowing when it will happen, and moreso when that knowledge is revealed & percolated to the wider market is often just as important. When betting the timing of the resolution is imperative.
Consider Logical Inductors: the market is trying to price the propositions that are gradually revealed. [Actually—the logical part of it is a bit of a red herring: any kind of process that reveals information about events over time can be “inducted upon”; i.e. we consider a market over future events.] Importantly, it is not necessarily specified in what order the events appear!
A shrewd trader that always ‘buys the hype’ and sells just at the peak might outcompete one that had more “foresight” and anticipated much longer in advance.
Holding a position for a long time is an opportunity cost.
1. Resolution of events might have time delays (and it might not resolve at all!)
2. We might not know the timing of the resolution
3. Even if you know the timing you may still need to hold if nobody is willing to be a counterparty
(This shortform was inspired by the following question from Daniel Murfet: Can you elaborate on why I should care about Kelly betting? I guess I’m looking for an answer of the form “the market is a dynamical process that computes a probability distribution, perhaps the Bayesian posterior, and because of out of equilibrium effects or time lags or X, the information you derive from the market is not the Bayesian posterior and therefore you should bet somehow differently in a way that reflects that”?)
Timing the Market
Those with experience with financial markets know that knowing whether something will happen is only half the game—knowing when it will happen, and moreso when that knowledge is revealed & percolated to the wider market is often just as important. When betting the timing of the resolution is imperative.
Consider Logical Inductors: the market is trying to price the propositions that are gradually revealed. [Actually—the logical part of it is a bit of a red herring: any kind of process that reveals information about events over time can be “inducted upon”; i.e. we consider a market over future events.] Importantly, it is not necessarily specified in what order the events appear!
A shrewd trader that always ‘buys the hype’ and sells just at the peak might outcompete one that had more “foresight” and anticipated much longer in advance.
Holding a position for a long time is an opportunity cost.
1. Resolution of events might have time delays (and it might not resolve at all!)
2. We might not know the timing of the resolution
3. Even if you know the timing you may still need to hold if nobody is willing to be a counterparty
4. We face opportunity costs.
5. Finite betsize.