> At one point during the 2016 presidential election, the PredictIt prediction market—the only one legally open to US citizens (and only US citizens)—had Hillary Clinton at a 60% probability of winning the general election. The bigger, international prediction market BetFair had Clinton at 80% at that time.
Is it just that there is percentage-income-taxed error in prediction markets’ guesses, and this 20% discrepancy falls under this, or are markets unable to Aumann agree if they can only watch each other and can’t arbitrage?
I’m pretty sure income-tax doesn’t affect arbitrage bounds in the absence of other obstacles. (It does multiply the effective height of those obstacles.) That is, if PredictIt and BetFair had no caps, no user restrictions, and charged no fees, but you had to pay income tax on aggregate winnings, you would expect the prices to be the same. But if a profit opportunity had to be worth $100 to justify putting in the effort, then an income tax of 50% means $100 opportunities will be passed up and only $200 opportunities will be taken.
are markets unable to Aumann agree if they can only watch each other and can’t arbitrage?
Markets with friction will have their error bounded by the friction. Even if you could legally buy contracts on both PredictIt and BetFair, a withdrawal fee of 5% will mean that seeing a price of 45 on one site and 50 on the other site wouldn’t justify buying the cheaper options to try to drive the prices together, because when you pulled your guaranteed dollar out you would only get 95 cents, which is what that guaranteed dollar cost you. (The withdrawal fee’s effects are muted if there are lots of markets that close serially, as you can collect lots of arbitrage and then only pay the 5% once, but for rare high-volume events like presidential elections this isn’t that relevant.)
You would expect those prices to slowly drift together over time because of new entrants (who would buy the cheaper option if comparing them), but it wouldn’t be the immediate price-correction that you see in efficient markets.
> At one point during the 2016 presidential election, the PredictIt prediction market—the only one legally open to US citizens (and only US citizens)—had Hillary Clinton at a 60% probability of winning the general election. The bigger, international prediction market BetFair had Clinton at 80% at that time.
Is it just that there is percentage-income-taxed error in prediction markets’ guesses, and this 20% discrepancy falls under this, or are markets unable to Aumann agree if they can only watch each other and can’t arbitrage?
I’m pretty sure income-tax doesn’t affect arbitrage bounds in the absence of other obstacles. (It does multiply the effective height of those obstacles.) That is, if PredictIt and BetFair had no caps, no user restrictions, and charged no fees, but you had to pay income tax on aggregate winnings, you would expect the prices to be the same. But if a profit opportunity had to be worth $100 to justify putting in the effort, then an income tax of 50% means $100 opportunities will be passed up and only $200 opportunities will be taken.
Markets with friction will have their error bounded by the friction. Even if you could legally buy contracts on both PredictIt and BetFair, a withdrawal fee of 5% will mean that seeing a price of 45 on one site and 50 on the other site wouldn’t justify buying the cheaper options to try to drive the prices together, because when you pulled your guaranteed dollar out you would only get 95 cents, which is what that guaranteed dollar cost you. (The withdrawal fee’s effects are muted if there are lots of markets that close serially, as you can collect lots of arbitrage and then only pay the 5% once, but for rare high-volume events like presidential elections this isn’t that relevant.)
You would expect those prices to slowly drift together over time because of new entrants (who would buy the cheaper option if comparing them), but it wouldn’t be the immediate price-correction that you see in efficient markets.