The Cost Of Efficient Markets
I love these Zvi blog posts where he analyzes prediction markets and states where he thinks they are overrated and underrated. At the same time, it seems like they take a ton of work.
One way to look at a prediction market is that you have two forces in balance. One crowd thinks a proposition is likely to happen, another crowd thinks the proposition is unlikely to happen, and the price mediates between these two groups. In this view, the role of money is to stabilize the system, and you get useful information as a side effect.
Another way to look at a prediction market is across all predictions, who is making a lot of money, and who is spending a lot of money? The ideal prediction market has very intelligent predictions, with people working hard on intelligent analysis. Are these people making money, to get paid for their work? Maybe they don’t have to be, like on Metaculus; maybe they will just play for points.
For a predictor to make money on prediction markets, someone else has to be losing money. Who is willing to consistently lose money on prediction markets? You might get addicted to prediction markets, mistakenly overrate yourself, and keep doing it when you shouldn’t, like a gambling addiction. But it seems tough to get a large user base addicted to prediction markets when there are so many more optimized types of gambling out there. And friendly regulation for prediction markets is essentially predicated on it not “feeling like gambling”.
Stock markets avoid this problem. The intelligent analysts do get paid, but they are essentially taking a cut from the huge flows of money that go into stocks without deep analysis. If every index fund investor makes an extra 0.1% lower interest because they haven’t optimized their spend, that funds a whole lot of analysts to do research on optimal price levels.
It seems hard for prediction markets to ever be worth it for the money. I think they will have to be driven by people who are simply in it for the “love of the game”. In fact, writing this blog post makes me want to sign up for Metaculus, so that I can bet against some of the AI wagers that seem overrated….