Other than occasional use of Predyx, I'm pretty out of the loop on prediction markets. Since Maduro I have been paying a little more attention. The last few days certainly provided a lot to think about.
Pro prediction markets about warPro prediction markets about war
- When the US was building up military assets in the region over the past few weeks, the Iran strike markets moved days before most mainstream outlets were treating it as imminent. Traders were tracking carrier group movements, interpreting Rubio's public statements about Iran's ballistic missile program being a "big, big problem," and pricing in the failure of the Switzerland talks
- War markets create a real-time probability distribution over outcomes that is financially incentivized to be accurate. No pundit or think tank can offer that
- Hedging is another legitimate use case. If you're a shipping company routing through the Strait of Hormuz, an oil trader exposed to Middle East supply risk, or a business with employees in the region, a liquid market on strike probability lets you hedge in ways that traditional insurance markets can't match at that speed
Con prediction markets about warCon prediction markets about war
war markets incentivize monetizing nonpublic information, they enable direct manipulation of outcomes, and they corrupt decision-making incentives among those with authority over the events themselves. A military commander now has a financial interest in whether his unit holds or retreats. A diplomat negotiating a ceasefire can front-run her own assessment. The system is designed so we'd likely never know.
it morally acceptable to profit from correctly predicting that bombs will fall on people? Polymarket traders who were long on today's strike are making thousands, even millions, while an elementary school in Iran's Hormozgan province was reportedly hit.
This article ends with a call for more regulation, because:
There's a fundamental difference between a corporate insider buying shares before an earnings beat and a military reservist signaling strike timing to enemy intelligence analysts watching Polymarket order flow.
Is this true? Also, why shouldn't it be up to the employer to deal with an employee who indirectly leaks secret info in order to make money on a prediction market?
I guess one answer is that there is an asymmetry here: employers can't pay all employees as much as their inside knowledge might be worth on a prediction market.
Sats for your thoughts.
It should.
Maybe they will have to. Ultimately, there's no putting the toothpaste back in the tube, so incentives will have to be realigned.
A lot of this is irrational squeamish pearl clutching. Trauma surgeons and hospitals profit off violence and no one bats an eye or suggests they shouldn't be compensated. Providing advanced warning that someone's home is about to be blown up can save their life just as much as a doctor patching them up afterwards.
I have heard grim accusations of pharmaceutical companies or health insurers who have an incentive to keep people sick. It's one thing to profit from the eventuality, it's another to cause the eventuality that leads to profit. I have assumed that many of the anti prediction market arguments are the latter.
The article raises the concern that prediction markets will incentivize the leaking of state secrets -- I don't find this compelling. If the state can't prevent its employees from participating in markets with insider knowledge, how can they prevent them from accepting bribes?
But I am more interested in the idea that prediction markets can give people an incentive to influence the outcome. This is true, I think. I may even be fine with it as a new force in society.
I'd argue that financial incentives within the medical industry do influence decision making towards hte more profitable outcomes.
It's not quite as far as saying they cause the medical problems, but it is going as far as to say their treatment decisions are influenced by the financial incentives, and that some of those treatment decisions may lead to worse outcomes for the patients.
I think it's also safe to assume the industry doesn't invest in finding unprofitably cheap cures.
I totally agree, but this isn't entirely the fault of prediction markets. Acts that should be criminal, starting wars for instance, are immune from justice.
This made me think for a while. I didn't really consider it that way before.
I think hedging [if it actually works correctly!] is a real societal benefit that could win over a lot of the skeptics. I don't see the current markets quite being there yet, both from a liquidity perspective and simply from perception; however I think this usecase needs to be emphasized better, and possibly even taken into consideration when designing the precise phrasing of questions, because someone looking to hedge a risk usually has a specific scenario in mind, while gamblers will simply look at the odds and gamble accordingly.
The example of hedging that the author uses in the article is a shipping company that uses a prediction market to hedge against potential losses. A quick look shows that the biggest shipping companies in the world are doing $10 - $50 billion in yearly revenue. The article said liquidity on Iran strikes was half a billion. So it seems your point about a lack of liquidity is spot on. I doubt any large organization is currently able to use prediction markets to hedge in a meaningful way. It looks like an order of magnitude increase is needed.
The main sin of a lot "moar regulation" analysts is that they go through in great detail the systemic incentives that result in a bad outcome, then they call for more regulation, without examining in great detail the incentives of the regulators, the distortionary effects of regulation, or the cost of enforcement
That's a more eloquent way of saying what struck me about the article: why does he think that regulation is free from these ugly incentives?
It's truly one of the great mysteries of our educated class, and I suspect it actually stems from how many professors teach economics.
"Thus, regulations" is possibly the biggest and most common handwave in all of econ.
https://twiiit.com/probaaron/status/2027765452689014822