Prediction Markets and Worse is Better
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Highlights
- Since markets are a good way to quickly aggregate information, but a messy way to aggregate specific information, many smart people have proposed prediction markets as a way to get better estimates of the odds of geopolitical events.
- A market requires someone to take each side of a trade, so for every person betting that a given event won’t happen, there’s someone betting that it will.
- It’s a classic case of adverse selection, and prediction markets are designed so that their biggest value creation happens through adverse selection against market-makers. The more specific the contracts are, the tougher this problem gets; if the market-maker is trading monthly rather than annual coup odds, and sees that there’s lots of interest in the March 2022 contract and none whatsoever in the other months’, that’s an even stronger signal.
- Longbets is generally not to aggregate information in the form of prices; it’s to aggregate information in the form of the arguments each side makes; the bets themselves are a fun feature,
- It makes sense for Google to set rules early and focus on whitelists rather than blacklists; as in other domains, the black-hat behavior scales better than white-hat behavior, so spam and malware are the default.