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Overcoming Bias Commenter's avatar

"The idea is that when the information isn't feasible to compute, then markets come into their own. The market accomplishes an aggregation no individual computing agent could--exactly because the information is so complex and dispersed."

That only works for existing financial markets because the participants each know a different piece of the puzzle: their personal preferred price and personal flexibility (the market solves a communication problem), plus the market is a self-fulfilling prophecy machine. With prediction markets you lose those properties (the event can completely ignore the prediction market and rather than having unique and sufficient pieces of the puzzle the participants all hold similar or even the same piece, because they'll rely on a handful of complicated calculation models, and even if they had unique pieces there would be no guarantee they were sufficient), the dynamics are just fundamentally different. I don't quite know why Robin Hanson doesn't see that.

"If it isn't available to anyone, then prediction markets (if they correctly combine the available information) will do better than anyother method of prediction."

The least worst option can still be so bad it's not worth it (and this is to be expected for most interesting events you'd want to predict) and as you say these prediction markets come with a cost.

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Stephen Diamond's avatar

No, reliability (or accuracy if you prefer) may still be very low because the information required for good predictions is not available to the investors (inside information is required or it's really complicated or not even feasible to compute).

The idea is that when the information isn't feasible to compute, then markets come into their own. The market accomplishes an aggregation no individual computing agent could--exactly because the information is so complex and dispersed.

If there's information that's not available to investors, then either it's available to other people or not. Only in the former case is it a potential argument against prediction markets. If it isn't available to anyone, then prediction markets (if they correctly combine the available information) will do better than any other method of prediction. And that's the only relevant question (besides how much do the methods cost to implement, which is the big question that Robin tends to avoid).

[Added.] But there's one important reason prediction markets make information less available than it would be without prediction markets. This does require consideration I haven't seen it given: Prediction markets will foster hoarding information that would otherwise be public. (Thus, there is conflict between prediction markets and public argument and discussion.)

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