[DINKDINK]

A more accurate phrase is "Event Derivative"

A derivative (a contract which is representative of some good, right, entitlement) based on the outcome of an event occurring or not.

Event derivatives are all around us. You buying fire insurance grants you the right to sell, to an insurance writer, a smoldering pile of wood (worth $2) at a price of say 30% of the unburned value of your home (similar to an OTM put option). An accidental-death insurance contract being worth a negligible amount until the subjects death.

What people often get wrong about EDs is

1. Whether or not they accurately predict events: they don't; they reflect the price, or odds, at which a market is willing to swap exposure. e.g. One pays a insurance costs because it's more profitable to swap risk than deal with exposure.

2. Confusion around incentives: Yes, each party swapping exposure will change their behavior -- which is a feature, not a bug. A company buying fire insurance can now enter into commerce otherwise prohibitive unlocked by swapping fire risk with an insurance writing company who has incentives to prevent a fire risk -- and do so at scale, coordinating multiple parties.

3. Lack of information about unfettered demand for the products. People claim there's no demand for EDs but neglect to take into account regulations: prevent people from purchasing them freely, political manipulation of prices when buyers are unhappy with the market price for risk, regulatory capture creating anticompetative producer protections, observe that because because of bans the inferior counts some EDs have been forced into are insufficient.

The global policy failure of covid has been around risk pricing, risk-exposure swapping, and effective, at-scale incentive coordination.

An exercise: An assassination market opens for the price of your head. In which case(s) should you be most concerned for your life:

[A] Exposure available at .99 on the 1

[B] Exposure available at .01 on the 1

[C] Exposure available at .5 on the 1

@HarryDCrane on Twitter is an applied researcher in this area, read him if you're interested in more -- I know I have.

[lifeisstillgood]

What does "Exposure available at .99 on the 1" mean please?

(I hate guessing in stats and odds - the jargon used to express things has so many subtleties)

[DINKDINK]

The available price is 99 cents

[lifeisstillgood]

So ... there is a market in killing me. At 99c on the dollar means (I think) that if I lay a bet that someone will assassinate me (by xmas) I sill have to pay 99c to get a dollar payout.

At 1c to get 1 dollar - That to me implies no-one thinks I will be killed (either I live in the Oval Office so it's very hard or frankly no-one wants to waste the bullet)

At 99c to get 1 dollar it's a near certainty. I am already tied up in a basement somewhere.

I think the 5c one

[DINKDINK]

This is the discussion around prices/exposure swapping/speculation I wanted to occur.

If someone has the ability to buy yes exposure at 1 cent, subsequently kill me, and then collect 100 cents that's pretty high pay out odds. The potential hitman has 99 cents of margin to use to kill me and still be profitable.

If the hitman buys at 99 cents, he looses the majority of the bet if he doesn't kill me. The person who took the other side has significant margins to protect me (from their prospective they bought no at 1 cent).

at 50 cents we both loose or gain the same amount of money.

I think I'd be more concerned for my safety in case A,B than in case C.

The other dimension of derivatives is how much "Open Interest" (OI) -- or the quantity of contracts/exposure -- that exists for a contract. I think I'd be concerned for my safety if there was any appreciable "yes" OI for the contract that wasn't me. So my strategy would be to buy up all "yes" contracts -- e.g. the people who want exposure to me dying or believe I will die -- so no one has an incentive to kill me.