[tptacek]

The entire idea of a prediction market is to aggregate insider information. If you don't have insiders, you're not doing predictions, you're just doing gambling.

Granted: that's what almost every Polymarket user is actually doing. But that's a bad thing. The insider whales are the only ones actually using it for its intended purpose.

[paxys]

No, the entire point is gambling. Yes there is insider trading mixed in as well, but the vast majority of events these markets are pushing and people are betting on don't have "insiders" at all. Sports, election winners, Bitcoin/stock/commodity prices, weather forecasts, movie box office receipts. None of this is about insider information, just pure gambling.

[tptacek]

The real point of Polymarket is gambling, we agree. I'd extend that argument to every prediction market that is open to all comers in which people can meaningfully gamble. But that's not the original concept of a prediction market. I'm not here to defend Kalshi and Polymarket, both of which I think are pretty evil.

[giarc]

It's not 'predicting' when the outcome/answer is known. From the wiki entry on prediction markets "The main purpose of prediction markets are eliciting aggregating beliefs about an unknown future event."

[tptacek]

I think you should probably read more about the background of prediction markets. Robin Hanson is a useful place to start. The whole concept of a prediction market is to convert private information into prices. That only works with "insider" information.

[schoen]

As I said in a parallel comment, Hanson was also thinking about scientific questions, where there are asymmetries in knowledge but people can often invest in research that improves their own knowledge (like by performing an experiment or a scientific expedition or something). So, Hanson believed that prediction markets could incentivize people to invest in scientific research in order to get an edge over other market participants in such questions. That doesn't exactly make them insiders, though.

Interestingly, it doesn't necessarily incentivize them to publish the detailed results of their investigations. They're incentivized to reveal what they expect to happen (based on how they bet), but not necessarily incentivized to reveal why they think so, or how they know. E.g. if you became able to predict the weather more accurately than other models over some timeframe, prediction markets would incentivize you to reveal (some aspects of) your predictions, but not your method for making those predictions.

[tptacek]

He wrote a whole paper on this.

https://mason.gmu.edu/~rhanson/insiderbet.pdf

[schoen]

Thanks, I forgot about that one. I've read some of his other writing on this subject and I didn't remember this paper.

[tptacek]

It's OK, I didn't have it in cache either, I just remembered "people like Robin Hanson have said insider trading on prediction markets is a feature not a bug" and GPT5 tracked it down for me. :)

[giarc]

I don't know much, but I can't see why betting on a known outcome is good? Why not just ask the knower? Also, just because Robin Hanson says "it's about aggregating insider information" makes it true. He writes some stuff.....

[tptacek]

The idea is that people have all sorts of fragmentary information about future events that they can't directly reveal, due to confidentiality or trade obligations (among other things), and that a prediction market effectively liberates the directional content of that information by converting it into prices.

Robin Hanson can credibly claim to have invented prediction markets as we understand them today.

[giarc]

"that a prediction market effectively liberates the directional content of that information by converting it into prices."

I can see this, and I guess maybe my issue is with the phrasing of "aggregating" insider information. Because you aren't just aggregating insider info, you are also aggregating non-insider information, but no one (but the insider) knows what is right.

Is there different types of prediction markets then? One where there is a true insider and one without? For example, you could take bets on weather it will rain on Saturday. People can make educated guesses, but no one really knows (no insider). On the flip side, Kanye could create a bet on whether he will run for president. He would be the only insider, so again, aggregating insider and non insider information.

[kelnos]

> you are also aggregating non-insider information

You're not really aggregating non-insider information, because in these cases, it's not really "information", it's just (at best) rational guessing or (at worst) gambling.

But yes, Kalshi and Polymarket essentially aggregate gambling, rational guesses, and insider information that's likely to be correct. It's a losing game unless you're an insider, and these companies profit off of other people's addictions.

[tptacek]

I would argue that a "market" in whether it will rain on Saturday isn't really a prediction market, or even a market, at all. It's just a bookmaking operation. The core function of any market, in anything, is price discovery.

What's the difference between a "Monday it will rain" market and a NCAAF prop bet on a team's rushing yards? I could argue that DraftKings prop bets are actually more like prediction markets than these "will it rain" bets. People actually do have directional information to contribute to sports propositions!

(I think online sports betting is evil.)

[lxgr]

You seem to be arguing that that's the canonical definition of a prediction market, and anything else, including markets merely aggregating non-insider beliefs about future events, should be called something else. Do you have a better proposal?

[tptacek]

I don't need one.

[schoen]

Well, it's confusing because you have markets on questions with very different characteristics in terms of whether they are exogenous or not (and whether they are exogenous from the perspective of particular groups), or just with different degrees of asymmetry regardless of whether there are literal "insiders".

Like, prediction markets have questions ranging from what the weather will be in a certain year, to who will win elections, to what stock prices or exchange rates will be, to whether companies will announce specific products, to whether particular people will start dating, to whether a specific person will say a specific word during a conference (some of the Manifold "prop bets" for Manifest).

These are not the same kinds of questions in terms of whether there are insiders at all or who the insiders are. Maybe we can't expect prediction markets to have the same dynamics in all of these cases.

Depending on what you want out of a prediction market, there's probably a sweet spot in terms of whom you should expect (or want) to be trading in it.

In the most exogenous events, those that are most outside of the control of individuals or groups, I think Robin Hanson hoped (in proposing "idea futures") that people would be incentivized to invest in research in order to gain a statistical edge in the market, but also assumed that there wasn't anyone who was inherently drastically better positioned to get information about the question than anyone else. E.g. "I will spend $X to get a better estimate of this probability (hopefully by otherwise ethical means?), and that will make my expected return from buying $Y worth of prediction contracts greater than $(X+Y)". Indeed not something retail investors or gamblers should probably participate in.

It's also true that in some cases where there are true insiders it can give the insiders a financial incentive to reveal confidential information. From the point of view of trying to get the most accurate possible estimate of the likelihood of future events, that would indeed also be a success, even if the process was "unfair" to non-insiders.

[tptacek]

Yeah, I mean, they're a wretched hive of scum and villainy, I preemptively agree. I'm just saying, insider bets don't have the same ethical or legal valence on a prediction market that they do in the financial markets (even there, at least in the US, the principles underlying insider trading law are really poorly understood.)

[schoen]

It's funny to think that the most villainous markets might be some of the humorous prop bets where the person creating the market (or a friend of the person creating the market) literally completely controls the outcome. Like "will I say SOME_WEIRD_WORD on stage at the conference tomorrow?".

Although maybe the villainy would come in more from deceiving people about whether or not an event was under your control, more than merely encouraging people to bet on an event that was clearly and unambiguously under your control.

[tptacek]

I agree that is funny and want to take this opportunity to say I think things like Polymarket are bad, a real corruption of the original idea. I'm not sticking up for them!

[schoen]

What uses or structures of prediction markets would you like to see? For things like Polymarket, are you more particularly concerned about the kinds of participants (e.g. people who really are just gambling for entertainment), or about the kinds of questions that are the subjects of contracts?

[tptacek]

The original prediction markets were internal things at large companies, which I think are a great idea. I've flirted for a long time with doing a vulnerability prediction market. The good-faith incarnations of prediction markets aren't open to all comers; they're structured so you can't meaningfully gamble on them.

[anigbrowl]

If you don't have insiders, you're not doing predictions, you're just doing gambling.

Non-insiders can't make predictions? I'm not into betting as a hobby but I make minor bets with myself or friends on topics with clear win-loss conditions in areas of politics where I consider myself knowledgeable. I'm pretty good at it since I find it easy to distinguish between results I'd like to see vs what I expect to actually happen.

[tptacek]

They can, they're just not doing anything they couldn't do at a blackjack table.

[anigbrowl]

I don't think you have a real point here, and are just using pejorative language about gambling to suggest one. Your thesis seems to be that only insiders can make valid predictions, which is nonsense.

[tptacek]

I'm saying that most people --- and functionally all the people who feel victimized by insiders --- on Polymarket are gambling, not predicting. I feel pretty comfortable with how sound that argument is. I agree that there are users of prediction markets who are neither "insiders" (for whatever definition of that you want to use) nor gamblers, but they're participating with the understanding that they're bidding alongside insiders. And they're a tiny cohort.

If it helps, draw a line between "entertainment" and "enterprise", and use whatever term you like for uses on the "entertainment" side of the line. Either way: it has stark implications for the notion of insider impropriety.

[anigbrowl]

This is just redefinition to belabor your insiders point (which I am not disagreeing with). Non-insiders are gambling, but they are also making predictions, with varying degrees of skill

Some kinds of gambling are truly random (unless they are scams) and no prediction is possible. Other kinds involve some degree of skill and predictive power. For example, people can make predictions on races based on past form, even though the element of chance can't be eliminated. It seems like you're trying to redefine 'prediction' to mean 'anticipated outcome as assessed by the most informed' in order to disqualify the validity of any opinions held by non-insiders.

I get that you want everyone to be aware of how prediction arguments were originally a fun way for experts to drive decision making without writing ever-longer arguments for their position. But you seem to be overlooking the the fact that objections are not so much to insiders disrupting hte prediction market as the impropriety of government officials or their special friends cashing in on military adventurism. Said government officials defend engaging military adventures without consent or even notice to Congress by citing security, yet placing big bets on markets to make a quick profit is highly insecure.

[tptacek]

I don't care about insiders cashing on on adventurism. Or, rather, I care about the adventurism, but I do not care even a little bit about the impact of it on gambling platforms like Polymarket. I think I'm on reasonably firm footing when I say that (a) the inventors and popularizers of modern prediction markets and (b) US law doesn't care either.

The irony here is that the one bank-shot argument I'd see in the medium term for "insider trading" enforcement at places like Polymarket is Nevada Gaming Commission-style gambling regulation.

[lxgr]

Would you argue the same for the stock market, i.e., that the only rational active market participants are insider traders? If not, why not?

[tptacek]

I would say that the popular conception of insider trading as a problem of fairness to other traders on financial markets is misapprehended, but no, it's not at all true that the only rational actors on financial markets are insiders.

[lxgr]

> the popular conception of insider trading as a problem of fairness to other traders on financial markets is misapprehended

Well, it's the legal theory underpinning insider trading laws in much (all?) of the EU.

And the US might have a different legal theory underpinning their regulations, but practically, it largely amounts to the same effect, so under POSIWID, it's questionable whether the difference matters much.

> no, it's not at all true that the only rational actors on financial markets are insiders.

Then a non-insider-trading prediction market should be possible and at least somewhat useful too, no? You'd essentially create incentives to do thorough research and analysis of public information and publish the results.

Whether it's practically possible to enforce is a different question.

[UncleMeat]

As a philosophical idea, yes. In practice something else is happening. The purpose of a thing is what it does.