“Predictive market derivatives” is on my list of things I should write about. What, precisely, do you mean by shorttermism? Do you mean how placing long-term bets in prediction markets ties up capital that could otherwise be put to use? (I think I understand you, but I want to be certain first.)
Do you mean how placing long-term bets in prediction markets ties up capital that could otherwise be put to use?
Yes, so canny traders have an incentive to ignore long-term questions even though that makes the market somewhat useless. There’s an adverse selection effect where the more someone has going on the more they’ll focus on short closing dates.
(But I realize that long-term bets are still worth something to them, this doesn’t necessarily prevent them from weighing in at all. If a market consisted solely of very good forecasters, I’d expect the predictions of long-term bets to be more volatile (less liquidity) but still roughly well informed, however, it doesn’t consist solely of very good traders, and also, sometimes the skills you need to do well on small timescales are very different from the skills you need on longer timescales, so in some worlds we might not expect prediction markets to work well at all. One of the very anticapitalisms that I’ve noticed is that expertise doesn’t always generalize out of domain, while money can stray into whatever domain it wants to. Reflecting, though, subquestion: If it’s not for the expert to decide for themselves (and with the aid of consultants) where their skills generalize to, why should we think we can appoint someone else who’s better at making that decision? It seems unlikely that we could.)
Here’s the short version: Suppose you think a prediction is mispriced but it’s distant in the future. Instead of buying credits that pay out on resolution, you buy futures instead. You don’t have to tie up capital, since payment is due on resolution instead of upfront. Your asset equals your liability. There is no beta.
Financial derivatives solve the shorttermism problem in traditional securities markets. If you use them in prediction markets, then they will (theoretically) do the exact same thing, by (theoretically) operating the exact same way. In practice, thingsgetcausal, and that’s before you add leverage and derivatives.
One of the very anticapitalisms that I’ve noticed is that expertise doesn’t always generalize out of domain, while money can stray into whatever domain it wants to.
Doesn’t matter. It just means that prediction markets have to be sufficiently capitalized to work. A hedge fund isn’t going to throw its smartest brains at a market with only $100 of total market capitalization.
Derivatives solve prediction market shorttermism? I didn’t realize that. Has that been written up anywhere?
“Predictive market derivatives” is on my list of things I should write about. What, precisely, do you mean by shorttermism? Do you mean how placing long-term bets in prediction markets ties up capital that could otherwise be put to use? (I think I understand you, but I want to be certain first.)
Financial derivatives work the same way in prediction markets as they do on existing securities markets. I already wrote a little bit about derivatives in existing securities markets, but am not sure that post fully answers your question.
Yes, so canny traders have an incentive to ignore long-term questions even though that makes the market somewhat useless. There’s an adverse selection effect where the more someone has going on the more they’ll focus on short closing dates.
(But I realize that long-term bets are still worth something to them, this doesn’t necessarily prevent them from weighing in at all. If a market consisted solely of very good forecasters, I’d expect the predictions of long-term bets to be more volatile (less liquidity) but still roughly well informed, however, it doesn’t consist solely of very good traders, and also, sometimes the skills you need to do well on small timescales are very different from the skills you need on longer timescales, so in some worlds we might not expect prediction markets to work well at all. One of the very anticapitalisms that I’ve noticed is that expertise doesn’t always generalize out of domain, while money can stray into whatever domain it wants to. Reflecting, though, subquestion: If it’s not for the expert to decide for themselves (and with the aid of consultants) where their skills generalize to, why should we think we can appoint someone else who’s better at making that decision? It seems unlikely that we could.)
Here’s the short version: Suppose you think a prediction is mispriced but it’s distant in the future. Instead of buying credits that pay out on resolution, you buy futures instead. You don’t have to tie up capital, since payment is due on resolution instead of upfront. Your asset equals your liability. There is no beta.
Financial derivatives solve the shorttermism problem in traditional securities markets. If you use them in prediction markets, then they will (theoretically) do the exact same thing, by (theoretically) operating the exact same way. In practice, things get causal, and that’s before you add leverage and derivatives.
Doesn’t matter. It just means that prediction markets have to be sufficiently capitalized to work. A hedge fund isn’t going to throw its smartest brains at a market with only $100 of total market capitalization.