[dogcomplex]

Prediction markets are just fine IF they have some means of regulation against insider trading and perverse incentives. This phase is the same thing derivatives markets looked like before the 2008 crisis and Dodd-Frank, and several other waves before that of crisis and reform (Securities Act, Market Reform Act).

Every new financial medium gets its moment in the sun when all the crooks extract everything they can, before eventually market governance steps in. Crypto's been in scammer phase for a while. It needs decentralized governance to solve it this time though, since obviously classic governance is a dumpster fire and couldn't enforce anything on crypto even if it tried.

[michaelt]

> Prediction markets are just fine IF they have some means of regulation against insider trading

Why?

If a prediction market is supposed to predict it makes no sense to exclude the best informed people. If I want to know the risk of a Boeing airliner crashing this year, Boeing insiders have much more to contribute than armchair observers.

And if a Boeing insider sabotages a plane to profit on a prediction market - that's illegal. If they're willing to break the law on sabotaging planes, they're surely also willing to break the law on insider trading at the same time. If we think this is a realistic risk, prediction markets should be banned entirely.

Only reason to exclude insiders is if the real purpose of a prediction market is recreational gambling.

[intrasight]

I agree. Don't bar anyone.

But do require KYC on all customers and require their profiles and wagers to be public. The societal values of prediction market data would be an order of magnitude more valuable this way.

And use of illegal insider info would cease.

[Shaanie]

How do you suppose that would work? The only predictions possible are things which are virtually impossible to influence, like atmospheric events?

[AnthonyMouse]

> This phase is the same thing derivatives markets looked like before the 2008 crisis and Dodd-Frank, and several other waves before that of crisis and reform (Securities Act, Market Reform Act).

Just because a rule was created after something bad happened doesn't mean that the rule is effective to prevent it from happening again. The most common result when they try to ban something without removing the incentive for it to happen is to cause it to happen less obviously. Then the rule (and all its unfortunate costs) gets credited with not observing the bad thing anymore, even though that's not the same as actually preventing it.

Notice that you can use the stock market in the same way as a prediction market. After that healthcare CEO got murdered the company's stock took a hit, as anyone could reasonably have predicted it would. That's a perverse incentive in line with betting that someone will kill the CEO. We don't really have a great way of preventing stock trading from creating that incentive, we mostly just rely on the fact that if you do the murder then murder is very illegal. But if that works for the stock market then why doesn't it work for prediction markets?

[NoboruWataya]

> Notice that you can use the stock market in the same way as a prediction market. After that healthcare CEO got murdered the company's stock took a hit, as anyone could reasonably have predicted it would. That's a perverse incentive in line with betting that someone will kill the CEO. We don't really have a great way of preventing stock trading from creating that incentive, we mostly just rely on the fact that if you do the murder then murder is very illegal. But if that works for the stock market then why doesn't it work for prediction markets?

This is true in theory, but in practice the impact of any regular individual's actions on a company is probably going to be small and uncertain enough that it's difficult to make a healthy and reliable profit from. Even the very extreme example of murdering the United Healthcare CEO seems to have caused the stock to drop ~16.5% (assuming the drop is entirely due to the murder). That's like placing a bet with ~1/6 odds. You'd need to short a lot of stock to make that worth the risk of murdering someone (leaving aside any moral issues obviously). You could use leverage to juice those returns but that is expensive and risky, too. If you can afford to deploy enough leverage to make it worth it, you can probably find ways to make money that don't carry a risk of the death penalty.

I guess viewed in this way a bet on a prediction market is like a very cheap, highly leveraged bet on a specific outcome. So the incentives are much stronger as the potential reward for the risk taken is greater.

[AnthonyMouse]

> You'd need to short a lot of stock to make that worth the risk of murdering someone (leaving aside any moral issues obviously).

When they know exactly when something is going to happen, buying put options that are cheap because they're slightly out of the money seems like it would be pretty effective.

> I guess viewed in this way a bet on a prediction market is like a very cheap, highly leveraged bet on a specific outcome. So the incentives are much stronger as the potential reward for the risk taken is greater.

You seem to be trying to make this about leverage as if that's a thing that isn't available anywhere else.

Let's try another example. Some group breaks into the systems of some publicly traded company and gets access to everything. Now they're in a position to publicly disclose their trade secrets to competitors, publish internal documents that will cause scandals for the company, vaporize the primary and backup systems at the same time, etc. Anything that allows them to place a bet against the company gives them the incentive to do this; the disincentive is that the thing itself is illegal. Leverage gives them a larger incentive, but there are plenty of wages to place a leveraged bet in the stock market.

[NoboruWataya]

> When they know exactly when something is going to happen, buying put options that are cheap because they're slightly out of the money seems like it would be pretty effective.

But you don't know exactly what would happen. You know what you will do, but not how it will affect the company's stock price. Maybe it will go down a little, maybe it will go down a lot. Maybe you kill the CEO on the same day as good news is published about the company, which offsets the drop. Or maybe the market just decides the guy wasn't that good a CEO anyway. So you bought a bunch of cheap puts with a strike price of 100, but the stock only drops to 101, and you lose everything. You can buy puts with a higher strike but they will be more expensive.

> Leverage gives them a larger incentive, but there are plenty of wages to place a leveraged bet in the stock market.

Yes, but they are expensive, is my point.

Generally, the disincentive outweighs the incentive. You can increase the incentive through leverage. But that also increases the costs, which increases the disincentive.

There may well be situations where the incentive outweighs the disincentive. But in the context of traditional financial markets I think those situations are likely very rare due to the risks and costs, whereas with a predictions market the risks and costs could be reduced, so it is more likely to happen.

[AnthonyMouse]

> But you don't know exactly what would happen. You know what you will do, but not how it will affect the company's stock price. Maybe it will go down a little, maybe it will go down a lot. Maybe you kill the CEO on the same day as good news is published about the company, which offsets the drop.

You never know exactly what would happen. You know what you will do, but not if the CEO is going to catch the flu and not show up that day, or have better security than you were expecting, or have a great surgeon, or a spouse who is willing to keep them on life support until after your prediction market contract expires.

> Yes, but they are expensive, is my point.

Only they're not. There are many ways to bet all or nothing on something people generally expect to have a <1% chance of happening, so that you either lose $1000 or make $100,000. Under normal circumstances you could make that bet 100 times in a row and lose $100,000 and the counterparty is happy to take all your money, but if you're able to do something to change the outcome yourself then it's different, which is why it's the same.