The famous philosopher Kant saw bets as encouraging thoughtfulness and discouraging self-deception: The usual touchstone of whether what someone asserts is mere persuasion or at least a subjective conviction, i.e., firm belief, is betting. Often someone pronounces his propositions with such confident and inflexible defiance that he seems to have entirely laid aside all concern for error. A bet disconcerts him. Sometimes he reveals that he is persuaded enough for one ducat but not for ten. For he would happily bet one, but at ten he suddenly becomes aware of what he had not previously noticed, namely that it is quite possible that he has erred. (
Good post, you do have to explain the limited use of prediction markets so far.
The success of prediction markets is real so far. Stock markets, bond markets are prediction markets. The growth of commodity markets, options markets, effectively markets for billion dollar bets mediated by wall street firms, etc etc. do need to be counted as successes. Presumably their existence speaks to where it is really possible to draw value from prediction.
When I contemplate betting in new prediction markets, I ask myself why I would put the effort in to making a well formed and rational prediction. My choice is to do my job, to take a narrow set of data and develop new algorithms for use primarily in the support and creation of wireless portable devices. So far, working always wins over figuring out how I would bet in prediction markets.
And that seems to make sense. Prediction markets are a zero-sum game. Work is not, when I have created something it can then be used by other people to do stuff they want to do. So perhaps one flaw with prediction markets is that until everything useful is already invented, the kinds of efforts required to do well in prediction markets will be competed away into development of new software and algorithms.
And that non-zero-sumness is also a feature of many of the successful prediction markets that already exist. The stock market I have read has returned an average of 7% a year for 150 years or something. Presumably you could get the same effort we see in predicting stocks in other prediction markets by the simple expedient of subsidizing them to the tune of 7% per year for 100 years. At 0% expected return, I have better things to think about.
There do seem to be some other predictino markets that are not as obviously providing a non-zero sum. Do commodity markets provide a consistent return? It is possible that they do, since these are essentially futures markets. Has anybody ever studied whether there is an average return to buying commodities now for delivery in 3, 6, or 9 months? There could be, it seems, the producers might be willing to pay, on average, the bettors, in return for cash now, for a laying off of risk.
What about options markets? On the one hand, it looks zero sum since there are as many long as short positions, as many call contracts sold as bought. But the bid-ask and laying-off strategies may mean that it is not zero sum: market makers may make money on the bid-ask spread while market participants may generally trend towards being long the underlying stock rather than short the underlying stock, thus "importing" some part, at least, of the 7% stock return. And the market makers don't lose that 7% since they can lay off their risk by being long the underlying stock themselves.
SO fantastic blog post, what explains the difference between prediction markets that have succeeded and those that haven't? Some fruitful areas to look at: successful prediction markets I can think of are subsidized by many % of nominal per year, AND the kind of effort that averages a 0% return in a prediction market averages a significant return when harnessed towards producing new algorithms (and presumably towards doing other sorts of intellectual creation).
Robin, you should add an update to the main body of this post with gwern's link.
daedalus2u, you say the problem exists in all markets, so can you provide evidence of it in futures markets? Those are the ones Robin usually uses as analogies.
"The person without fossil fuel assets doesn’t have the assets to back up bets comparable in value to my fossil fuel assets."Someone betting the wrong way is essentially offering free money to anyone willing to put up assets against them. There is no person on earth rich enough to outweigh the combined assets of all speculators willing to take their money.
If I can bet $1 and skew the global warming market such that my fossil fuel assets increase in value from $100 to $500, then I have made a profit of $399 for each $1 that I bet. I may lose that $1, but so what? The person without fossil fuel assets doesn't have the assets to back up bets comparable in value to my fossil fuel assets. I can spend $10 here, $25 there, and I am still way ahead of the people who are trying to protect the environment which is not monetized and which they don't own anyway.
"Or do you just mean that it wouldn’t make sense to take a bet offered by someone more knowledgeable than you?"
A combination of more knowledgeable and more powerful -they factor in the existence of other existing and potential market participants when they make a decision to manipulate.
In short term scenarios such as elections, big money backers of both parties could and would throw in huge amount of money in order to make it seem as if the odds were in their favor. That they might lose their money is irrelevant since they would be spending X amount of millions in a normal campaign anyway. To them it's just another expense. If it pays off then it's a bonus, if not, it's just another sunk cost of the operation.
Longer term windows involving things like pollution or global warming would definitely work differently.
The problem with political market manipulators is that its often smart to bet on the side of a powerful political market manipulator -sort of like not betting against the casino.
Could you be more specific about what problem with prediction markets you are describing?
I don't follow your analogy. It's not wise to bet against the casino because the casino makes its bets based on an accurate knowledge of the odds (a knowledge that is better than yours if you were tempted to bet). But manipulators make bets as though the odds are different than the manipulators really think. Otherwise, they wouldn't be manipulating the market; they would be helping it be more accurate.
Or do you just mean that it wouldn't make sense to take a bet offered by someone more knowledgeable than you? I grant that anyone who can influence the outcome has access to special knowledge, since they probably know their intentions better than you do.
Tyler,Predictive markets about elections is a different set of problems than predictive markets on coming existential threats, for example.That we don't already have robust and innovative predictive market designs for a whole bunch of things that aren't even repugnant isn't much a of a wicked problem, just a silly problem.
The problem with political market manipulators is that its often smart to bet on the side of a powerful political market manipulator -sort of like not betting against the casino.
the scenario you described above only works with a very high rate of participation.
I expect you're right about high participation being necessary to counteract the effects of manipulators on the market. Part Robin's point is that this is a problem that solves itself. The presence of manipulators encourages participation. If you think that Big Oil is skewing the market to give too-low odds to human-caused climate change, then you think that there is free money to be had by buying those bets.
I'm not prepared to argue too strongly against Robin on that since I've barely dipped my toe in the pool so to speak, but the scenario you described above only works with a very high rate of participation.
So it seems that without that very large volume of participants, big money movers behind people in both parties would be more capable of skewing the information. In theory the billionaires on both sides of the political spectrum would balance each other out, but I'm not so sure it would work like that in practice.
I might be wrong, and I think transparency in and of itself is problematic, and creates its own set of problems in that enforcing it the bureaucrats would attempt to put limits with those transparency rules. This would of course completely nullify the purpose of predictive markets, but again, I admit I'm speculating.
More to the point however, the stock market does not parallel how predictive markets would work as you seem to acknowledge now.
As for the rest of your comment, no offense, but it seems to be nothing more than your political rant so I don't know what to say. You've managed to fit in anti-Semitism, Sarah Palin, Fox news, conservatives, tie them all together and somehow this is relevant to the post?
So getting back to the subject at hand, predictive markets would be vulnerable to people trying to skew the information, but not prohibitively so. And their context to securities markets simply doesn't exist in the manner of which you've suggested.
That analysis ignores the value of the effect of those betting markets on systems outside the betting market.
I'm not sure what you mean. The effect you describe (deep pockets skewing betting markets to make their pockets deeper) is precisely the effect that the analysis is considering.
That analysis ignores the value of the effect of those betting markets on systems outside the betting market. If I can bet $1 in a global warming market and by skewing that market make $1000 on my fossil fuel holdings, I would be a fool to not place large bets on what ever increased the net present value of my fossil fuel holdings.
Not surprisingly, that is what AGW deniers are doing. Spending money on disinformation, skewing public opinion on AGW and by doing so increasing the net present value of their energy assets.
Ted Turner and George Soros would bet millions upon millions on every Democrat candidate regardless of their actual chances of winning since they would be spending that amount anyway in their normal campaign support. This would be another argument for transparency I believe.
Hanson argues that betting markets are especially robust against this kind of manipulation, even without transparency. If manipulators skew the odds, then that will encourage knowledgeable people to join the market. To these knowledgeable people, those skewed odds represent free money, which they can snatch up by taking the bets at the skew odds. This, in turn, will pull the market price back towards the correct value.
Indeed, the new price might be more accurate than if the manipulators hadn't gotten involved, because then the experts wouldn't have had as much incentive to participate, so the market price wouldn't have reflected their expertise.
Ray, I think you have a halcyon view of markets as only ways for willing buyers and willing sellers to transfer goods and services. That is something that markets are set up to try and accomplish. Markets have some degree of inefficiency, and so there are market makers who purport to increase the efficiency of the market and extract a fee for doing so. There are also the gamers, who try and decrease the efficiency of the market to increase the amount they can extract from it. Participants can play multiple roles in the same market. Decreasing the transparency of the market makes it less efficient and increases the amount that middlemen between the ultimate buyers and sellers can extract.
You can't have transparency when people are free to lie. In the case of election of candidates, are you going to hold candidates to actually being truthful? What sanctions would you impose for candidates who lie? What about candidates who say things which are factually untrue but which they believe? What about the now unlimited ads that can be paid for by anonymous corporations? Who will fund the research into the truth of them? Who will fund the dissemination of the actual facts behind the ads?
When information is not free and transparent, people wanting to game the system can subsidize the dissemination of information (true or false) that manipulates the society in the direction they want, see for example Fox News. When lies are repeated often enough, some people believe them. The Tobacco Industry did that for a long time, AGW deniers are doing it now, some Birthers are still doing it, there may be fewer of them, but some are still adamant. It was centuries of false Blood Libel against the Jews that set the stages for the Holocaust. Why have no conservatives called Sarah Palin on her blood libel against President Obama of “Death Panels”? The reason is because her lie helps conservatives. Conservatives have no interest and no incentive in disseminating facts that hurt their causes and so they don't.
When the cost of disseminating false information to skew the system is less than the profit made from that skewing, the rational actor will disseminate false information to skew the system. Conservatives are not being irrational, they are being completely rational. They can't accomplish what they want via truthful transparency so they lie.
Alas, since skepticism about accuracy seems one of the easiest barriers to overcome, via track records and lab experiments, I must increase my estimate of the overall difficulty of my goal.
So are track records actually good, except for the handful of very high volume short term prediction markets like presidential elections?
Good post, you do have to explain the limited use of prediction markets so far.
The success of prediction markets is real so far. Stock markets, bond markets are prediction markets. The growth of commodity markets, options markets, effectively markets for billion dollar bets mediated by wall street firms, etc etc. do need to be counted as successes. Presumably their existence speaks to where it is really possible to draw value from prediction.
When I contemplate betting in new prediction markets, I ask myself why I would put the effort in to making a well formed and rational prediction. My choice is to do my job, to take a narrow set of data and develop new algorithms for use primarily in the support and creation of wireless portable devices. So far, working always wins over figuring out how I would bet in prediction markets.
And that seems to make sense. Prediction markets are a zero-sum game. Work is not, when I have created something it can then be used by other people to do stuff they want to do. So perhaps one flaw with prediction markets is that until everything useful is already invented, the kinds of efforts required to do well in prediction markets will be competed away into development of new software and algorithms.
And that non-zero-sumness is also a feature of many of the successful prediction markets that already exist. The stock market I have read has returned an average of 7% a year for 150 years or something. Presumably you could get the same effort we see in predicting stocks in other prediction markets by the simple expedient of subsidizing them to the tune of 7% per year for 100 years. At 0% expected return, I have better things to think about.
There do seem to be some other predictino markets that are not as obviously providing a non-zero sum. Do commodity markets provide a consistent return? It is possible that they do, since these are essentially futures markets. Has anybody ever studied whether there is an average return to buying commodities now for delivery in 3, 6, or 9 months? There could be, it seems, the producers might be willing to pay, on average, the bettors, in return for cash now, for a laying off of risk.
What about options markets? On the one hand, it looks zero sum since there are as many long as short positions, as many call contracts sold as bought. But the bid-ask and laying-off strategies may mean that it is not zero sum: market makers may make money on the bid-ask spread while market participants may generally trend towards being long the underlying stock rather than short the underlying stock, thus "importing" some part, at least, of the 7% stock return. And the market makers don't lose that 7% since they can lay off their risk by being long the underlying stock themselves.
SO fantastic blog post, what explains the difference between prediction markets that have succeeded and those that haven't? Some fruitful areas to look at: successful prediction markets I can think of are subsidized by many % of nominal per year, AND the kind of effort that averages a 0% return in a prediction market averages a significant return when harnessed towards producing new algorithms (and presumably towards doing other sorts of intellectual creation).
Robin, you should add an update to the main body of this post with gwern's link.
daedalus2u, you say the problem exists in all markets, so can you provide evidence of it in futures markets? Those are the ones Robin usually uses as analogies.
"The person without fossil fuel assets doesn’t have the assets to back up bets comparable in value to my fossil fuel assets."Someone betting the wrong way is essentially offering free money to anyone willing to put up assets against them. There is no person on earth rich enough to outweigh the combined assets of all speculators willing to take their money.
If I can bet $1 and skew the global warming market such that my fossil fuel assets increase in value from $100 to $500, then I have made a profit of $399 for each $1 that I bet. I may lose that $1, but so what? The person without fossil fuel assets doesn't have the assets to back up bets comparable in value to my fossil fuel assets. I can spend $10 here, $25 there, and I am still way ahead of the people who are trying to protect the environment which is not monetized and which they don't own anyway.
"Or do you just mean that it wouldn’t make sense to take a bet offered by someone more knowledgeable than you?"
A combination of more knowledgeable and more powerful -they factor in the existence of other existing and potential market participants when they make a decision to manipulate.
More on manipulators:
In short term scenarios such as elections, big money backers of both parties could and would throw in huge amount of money in order to make it seem as if the odds were in their favor. That they might lose their money is irrelevant since they would be spending X amount of millions in a normal campaign anyway. To them it's just another expense. If it pays off then it's a bonus, if not, it's just another sunk cost of the operation.
Longer term windows involving things like pollution or global warming would definitely work differently.
The problem with political market manipulators is that its often smart to bet on the side of a powerful political market manipulator -sort of like not betting against the casino.
Could you be more specific about what problem with prediction markets you are describing?
I don't follow your analogy. It's not wise to bet against the casino because the casino makes its bets based on an accurate knowledge of the odds (a knowledge that is better than yours if you were tempted to bet). But manipulators make bets as though the odds are different than the manipulators really think. Otherwise, they wouldn't be manipulating the market; they would be helping it be more accurate.
Or do you just mean that it wouldn't make sense to take a bet offered by someone more knowledgeable than you? I grant that anyone who can influence the outcome has access to special knowledge, since they probably know their intentions better than you do.
Tyler,Predictive markets about elections is a different set of problems than predictive markets on coming existential threats, for example.That we don't already have robust and innovative predictive market designs for a whole bunch of things that aren't even repugnant isn't much a of a wicked problem, just a silly problem.
The problem with political market manipulators is that its often smart to bet on the side of a powerful political market manipulator -sort of like not betting against the casino.
the scenario you described above only works with a very high rate of participation.
I expect you're right about high participation being necessary to counteract the effects of manipulators on the market. Part Robin's point is that this is a problem that solves itself. The presence of manipulators encourages participation. If you think that Big Oil is skewing the market to give too-low odds to human-caused climate change, then you think that there is free money to be had by buying those bets.
It takes real courage to offer to bet on an untestable statement.
Tyrrell
I'm not prepared to argue too strongly against Robin on that since I've barely dipped my toe in the pool so to speak, but the scenario you described above only works with a very high rate of participation.
So it seems that without that very large volume of participants, big money movers behind people in both parties would be more capable of skewing the information. In theory the billionaires on both sides of the political spectrum would balance each other out, but I'm not so sure it would work like that in practice.
I might be wrong, and I think transparency in and of itself is problematic, and creates its own set of problems in that enforcing it the bureaucrats would attempt to put limits with those transparency rules. This would of course completely nullify the purpose of predictive markets, but again, I admit I'm speculating.
More to the point however, the stock market does not parallel how predictive markets would work as you seem to acknowledge now.
As for the rest of your comment, no offense, but it seems to be nothing more than your political rant so I don't know what to say. You've managed to fit in anti-Semitism, Sarah Palin, Fox news, conservatives, tie them all together and somehow this is relevant to the post?
So getting back to the subject at hand, predictive markets would be vulnerable to people trying to skew the information, but not prohibitively so. And their context to securities markets simply doesn't exist in the manner of which you've suggested.
That analysis ignores the value of the effect of those betting markets on systems outside the betting market.
I'm not sure what you mean. The effect you describe (deep pockets skewing betting markets to make their pockets deeper) is precisely the effect that the analysis is considering.
That analysis ignores the value of the effect of those betting markets on systems outside the betting market. If I can bet $1 in a global warming market and by skewing that market make $1000 on my fossil fuel holdings, I would be a fool to not place large bets on what ever increased the net present value of my fossil fuel holdings.
Not surprisingly, that is what AGW deniers are doing. Spending money on disinformation, skewing public opinion on AGW and by doing so increasing the net present value of their energy assets.
Ted Turner and George Soros would bet millions upon millions on every Democrat candidate regardless of their actual chances of winning since they would be spending that amount anyway in their normal campaign support. This would be another argument for transparency I believe.
Hanson argues that betting markets are especially robust against this kind of manipulation, even without transparency. If manipulators skew the odds, then that will encourage knowledgeable people to join the market. To these knowledgeable people, those skewed odds represent free money, which they can snatch up by taking the bets at the skew odds. This, in turn, will pull the market price back towards the correct value.
Indeed, the new price might be more accurate than if the manipulators hadn't gotten involved, because then the experts wouldn't have had as much incentive to participate, so the market price wouldn't have reflected their expertise.
Ray, I think you have a halcyon view of markets as only ways for willing buyers and willing sellers to transfer goods and services. That is something that markets are set up to try and accomplish. Markets have some degree of inefficiency, and so there are market makers who purport to increase the efficiency of the market and extract a fee for doing so. There are also the gamers, who try and decrease the efficiency of the market to increase the amount they can extract from it. Participants can play multiple roles in the same market. Decreasing the transparency of the market makes it less efficient and increases the amount that middlemen between the ultimate buyers and sellers can extract.
You can't have transparency when people are free to lie. In the case of election of candidates, are you going to hold candidates to actually being truthful? What sanctions would you impose for candidates who lie? What about candidates who say things which are factually untrue but which they believe? What about the now unlimited ads that can be paid for by anonymous corporations? Who will fund the research into the truth of them? Who will fund the dissemination of the actual facts behind the ads?
When information is not free and transparent, people wanting to game the system can subsidize the dissemination of information (true or false) that manipulates the society in the direction they want, see for example Fox News. When lies are repeated often enough, some people believe them. The Tobacco Industry did that for a long time, AGW deniers are doing it now, some Birthers are still doing it, there may be fewer of them, but some are still adamant. It was centuries of false Blood Libel against the Jews that set the stages for the Holocaust. Why have no conservatives called Sarah Palin on her blood libel against President Obama of “Death Panels”? The reason is because her lie helps conservatives. Conservatives have no interest and no incentive in disseminating facts that hurt their causes and so they don't.
When the cost of disseminating false information to skew the system is less than the profit made from that skewing, the rational actor will disseminate false information to skew the system. Conservatives are not being irrational, they are being completely rational. They can't accomplish what they want via truthful transparency so they lie.
Alas, since skepticism about accuracy seems one of the easiest barriers to overcome, via track records and lab experiments, I must increase my estimate of the overall difficulty of my goal.
So are track records actually good, except for the handful of very high volume short term prediction markets like presidential elections?