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Stephen Diamond's avatar

Rational predictors on the stock market?

But they fall short of complete rationality for reasons other than lack of incentive. Adequate incentives are what I take this discussion to be about. I think prediction marketers would be satisfied if they had sufficiently numerous traders as rational as stock market investors. It's the potential number of traders, absent huge subsidies, that's most questionable. The main problem is that, as gambling events, prediction markets fail the excitement test.

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Stephen Diamond's avatar

You subsidize by having transaction gains instead of transaction costs.

Well, yes, but there are various ways to subsidize transaction gains. The method of choice is to enlarge the pot.

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