Robin Hanson argues that prediction markets should be subsidized by those who want the information. (They can also be subsidized by “noise” traders who are not maximizing their expected money from the prediction market.) Under these conditions, the expected value for rational traders can be positive.
Good link, thanks. So Robin knows that zero-sum markets will be “no-trade” in the theoretical limit. Can you explain a little about the mechanism of subsidizing a prediction market? Just give stuff to participants? But then the game stays constant-sum...
Basically, you’d like to reward everyone according to the amount of information they contribute. The game isn’t constant sum overall since the amount of information people bring to the market can vary. Ideally, you’d still like the total subsidy to be bounded so there’s no chance for infinite liability.
Depending on how the market is structured, if someone thinks another person has strictly more information than them, they should disclose that fact and receive no payout (at least in expectation). Hanson’s market scoring rules reward everyone according to how much they improve on the last person’s prediction. If Bob participates in the market before you, you should just match his prediction. If you participate before him, you can give what information you do have and then he’ll add his unique information later.
Many thanks for the pointer to LMSR! That seems to answer all my questions.
(Why aren’t scoring rules mentioned in the Wikipedia article on prediction markets? I had a vague idea of what prediction parkets were, but it turns out I missed the most important part, and asked a whole bunch of ignorant questions… Anyway, it’s a relief to finally understand this stuff.)
They should be. Just a matter of someone stepping up to write that section. The modern theory on market makers has existed for less than a decade and only matured in the last few years, so it just hasn’t had time to percolate out. Even here on Less Wrong, where prediction markets are very salient and Hanson is well known, there isn’t a good explanation of the state of the art. I have a sequence in the works on prediction markets, scoring rules, and mechanism design in an attempt to correct that.
Good link, thanks. So Robin knows that zero-sum markets will be “no-trade” in the theoretical limit. Can you explain a little about the mechanism of subsidizing a prediction market? Just give stuff to participants? But then the game stays constant-sum...
There’s no problem with the game being constant sum.
Robin Hanson argues that prediction markets should be subsidized by those who want the information. (They can also be subsidized by “noise” traders who are not maximizing their expected money from the prediction market.) Under these conditions, the expected value for rational traders can be positive.
Good link, thanks. So Robin knows that zero-sum markets will be “no-trade” in the theoretical limit. Can you explain a little about the mechanism of subsidizing a prediction market? Just give stuff to participants? But then the game stays constant-sum...
Basically, you’d like to reward everyone according to the amount of information they contribute. The game isn’t constant sum overall since the amount of information people bring to the market can vary. Ideally, you’d still like the total subsidy to be bounded so there’s no chance for infinite liability.
Depending on how the market is structured, if someone thinks another person has strictly more information than them, they should disclose that fact and receive no payout (at least in expectation). Hanson’s market scoring rules reward everyone according to how much they improve on the last person’s prediction. If Bob participates in the market before you, you should just match his prediction. If you participate before him, you can give what information you do have and then he’ll add his unique information later.
Many thanks for the pointer to LMSR! That seems to answer all my questions.
(Why aren’t scoring rules mentioned in the Wikipedia article on prediction markets? I had a vague idea of what prediction parkets were, but it turns out I missed the most important part, and asked a whole bunch of ignorant questions… Anyway, it’s a relief to finally understand this stuff.)
They should be. Just a matter of someone stepping up to write that section. The modern theory on market makers has existed for less than a decade and only matured in the last few years, so it just hasn’t had time to percolate out. Even here on Less Wrong, where prediction markets are very salient and Hanson is well known, there isn’t a good explanation of the state of the art. I have a sequence in the works on prediction markets, scoring rules, and mechanism design in an attempt to correct that.
That would be great! If you need someone to read drafts, I’d be very willing :-)
There’s no problem with the game being constant sum.
I always assumed it was by selling prediction securities for less than they will ultimately pay out.