For example, with subsidized prediction markets, we can each specialize on the topics where we contribute best, relying on market consensus on all other topics.
Why do these prediction markets have to be subsidized? In the U.S., online prediction markets are currently considered internet gambling and are hampered. Is there a reason legal, laissez-faire prediction markets couldn’t take hold?
Prediction markets are currently immature and controversial, and so might have trouble bootstrapping.
Their legality is problematic. (The IEM had to get a special exemption from the SEC to run.)
Prediction markets like Intrade currently are structured in ways bad for financial return. (IIRC, the issue is that Intrade offers a very low or no interest rate on deposited funds—the float is a source of profit for it.)
Long-run prediction markets like many possible scientific or academic questions are not financially viable (see ‘opportunity cost’), while sports and gambling bets are inherently short-term, taking no more than a year.
A succession of short-term markets might help, but then you have the problem that with the natural low prices on ‘success’ shares, it’s hard to make any profit. (eg. imagine a ‘cold fusion in 2010’ market—it’d be at a penny or two. Suddenly shares double due to a new paper! But because it’s so lightly traded, you only made a dime on your prescient long position.)
(Did I miss any?)
Hence, subsidies. Peter McCluskey ran a market-maker bot (OB coverage). Some traders discuss bots; note that they say it’s hard to arbitrage Intrade & Betfair in part due to low volume and fees and costs (McCluskey’s page mentions that Intrade “agreed not to charge any trading or expiry fees”.)
Why do these prediction markets have to be subsidized? In the U.S., online prediction markets are currently considered internet gambling and are hampered. Is there a reason legal, laissez-faire prediction markets couldn’t take hold?
Prediction markets are currently immature and controversial, and so might have trouble bootstrapping.
Their legality is problematic. (The IEM had to get a special exemption from the SEC to run.)
Prediction markets like Intrade currently are structured in ways bad for financial return. (IIRC, the issue is that Intrade offers a very low or no interest rate on deposited funds—the float is a source of profit for it.)
Long-run prediction markets like many possible scientific or academic questions are not financially viable (see ‘opportunity cost’), while sports and gambling bets are inherently short-term, taking no more than a year.
A succession of short-term markets might help, but then you have the problem that with the natural low prices on ‘success’ shares, it’s hard to make any profit. (eg. imagine a ‘cold fusion in 2010’ market—it’d be at a penny or two. Suddenly shares double due to a new paper! But because it’s so lightly traded, you only made a dime on your prescient long position.)
(Did I miss any?)
Hence, subsidies. Peter McCluskey ran a market-maker bot (OB coverage). Some traders discuss bots; note that they say it’s hard to arbitrage Intrade & Betfair in part due to low volume and fees and costs (McCluskey’s page mentions that Intrade “agreed not to charge any trading or expiry fees”.)
Thanks. I’ve been curious about the interest question for a while.
McCluskey’s followup: http://www.bayesianinvestor.com/blog/index.php/2008/11/13/automated-market-maker-results/
Googling some more, relevant links are http://www.overcomingbias.com/2007/11/intrade-fee-str.html and http://bb.intrade.com/intradeForum/posts/list/4471.page
Probably could find more examples of how Intrade is not an optimal prediction market using this tag: http://www.overcomingbias.com/tag/prediction-markets