The microstructure of wealth transfer in prediction markets
jbecker.dev
jbecker.dev
A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $2000 per game.
The much worse example is the fact that you can make 100-1 odds on whether the US airstrikes Iran today... or How many times Pam Bondi says the word "China" in a press conference.
Somebody poor grunt who chose to earn a living by laboring (which has proven to be much less effective than being born with money) will be putting fuel in the bombers and thinking "I could just make an anonymous bet..."
It's a national security issue.
We saw this with the Venezuela attack. A flurry of trading and someone made $400,000 for placing a bet mere hours before the "surprise" attack. https://www.pbs.org/newshour/nation/a-400000-payout-after-ma...
With the prediction market, there is a financial incentive for people on the opposite side of the bet being motivated to uncover the malfeasance.
The prediction market is the mechanism by which this happens.
The trade was going long the 3x Oil&Gas ETFs the trading day beforehand. There was huge buying for absolutely zero perceived reason...then boom we just straight up kidnapped Maduro.
There exists "alternate data", some companies monitor all kinds of stuff, satellite pictures, etc, some of these companies surely saw the inevitable asset positioning just before such a big attack (150 planes).
Just like the Ukraine invasion was first visible on Google Maps as traffic jams !!! at the border at midnight
https://www.washingtonpost.com/technology/2022/02/25/google-...
You can also do entertaining things like determine if a factory/data-center is running at full capacity by looking at the fans in the cooling stacks. Satellites take the red, green, and blue channels separately at different times so you can see if a fan is spinning through the apparent chromatic aberration of the blades, same deal with anything else that spins or moves. If you know the satellite you're buying imagery from, its TLE and a little information about the sensor you can work out all sorts of fun details.
Just look at the lead up to the Ukraine invasion, the US intelligence services were practically screaming from the rooftops that it was happening. Russians were obviously stacking up on two borders. Meanwhile, reporters were on the street asking people how they felt about the oncoming invasion and they all said some variation of "they've been threatening that forever, it's all talk, it won't happen".
The Ukrainian government took the approach of not starting a full on panic. They thought maybe there was still some chance of stopping it. And not knowing 100% the day and time meant stopping the economy, people fleeing and such. It could even play into the hands of the enemy as they could react and postpone as well.
Some have criticized the government for that tactic science. Some might say they should have listened to the US intelligence instead, but that presumes people should trust the US intelligence more than their own government.
The pizza index is specifically about late-night pizza orders, when presumably most of those restaurants are closed (though some do appear to be open 24/7).
It only takes one person to pick up 40 pizzas, after all. Perhaps they could look at time estimates for a new order as a better indicator, if such an API exists prior to ordering.
https://finance.yahoo.com/news/trump-jails-venezuela-leaker-...
Anyone with a security clearance making bets like this is not a smart person.
No beleives MAGA nuts are trading experts.
By contrast, making public bets based on classified information that you are not authorized to publicize is a simple and relatively direct breach of laws regarding the handling of classified documents and state secrets.
It's both easy to track down stock traders due to KYC, and easy to prosecute due to laws.
Polymarket and friends make it both much harder to find the trader, and also it's less clear if there's a legal theory that lets you prosecute someone dealing in these new markets.
Sure, congress and the president can insider trade a bit here and there, but the everyday joe is rightfully afraid to.
1- Making a bet with privileged information. 2- Creating the event and making the bet.
2 would be a war crime, 1 would be a probabilistic leak.
Trump claimed they didn't want to pass through congress because they leak, and there were no leaks about the event. But if any personnel made a polymarket bet, that would constitute a leak. It wasn't acted upon, but if personnel continues to leak information in this manner, it is possible that an adversary will eventually listen to this signal, and that it was just ignored because it is too fresh.
This analysis would also make it clear why it would be immoral to participate in such markets as a civilian. Because if it is your country you might be compensating an insider for information, benefitting the enemy. And if you are not, you might be harming the enemy, but you would be an unlawful belligerent.
But most of us understand that prediction markets aren't that, no matter what Robin Hansen said when he was helping invent the modern incarnation of things like Polymarket and Kalshi. They're gambling venues, and we have "Nevada Gaming Commission"-style concerns about fairness. To me, the next logical step is to say that they should be heavily regulated, but in the era of DraftKings, that seems off the table.
Which would be great, if the mechanism and prize for "voting" were something other than people's basic means of survival.
Gambling addiction isn't bad because there's something wrong with predicting outcomes, it's bad because it causes people to lose all of their money.
"Kalshi, but with a maximum order size of $1" would be great. Kalshi, with a maximum order size of oh crap I can't pay my rent this month, is very bad!
A classic example is the color of the Queen's hat at Royal Ascot.
https://www.upi.com/Odd_News/2008/06/20/Bets-placed-on-queen...
https://news.williamhill.com/horse-racing/queens-hat-betting...
And the relevant one from 2005 - https://www.foxnews.com/story/hat-trick-upsets-british-booki...
> But alarms were raised Thursday morning, hours before the royal appearance, when a run of bets for brown started coming in, displacing light blue as the favorite.
> "Nobody was backing brown at all and suddenly everyone wanted in on it," Paddy Power (search), owner of the eponymous chain of betting shops that inaugurated the hat bet 10 years ago, told The Times.
> Power's odds on brown went from 12-1, to 2-1, to even and finally to 8-11 before he yanked the bet at 11:30 a.m., 2½ hours before the Queen was due to show.
> "Someone must have been in the know. We laid 50 pounds at 20-1 and 200 pounds at 10-1 and some smaller bets," David Hood, spokesman for rival betting chain William Hill (search), told the Daily Telegraph.
> ...
> When Elizabeth II finally made her appearance, she was indeed wearing a brown hat with cream trim.
> "Somebody has made a tidy sum," sniffed Hood.
> Both he and Power, who estimated his firm lost about 10,000 pounds, or $18,000, suspected palace insiders.
All without traceability or secret drops or whatever.
POSIWID
Everyone can make up a silly purpose.
Against POSIWID: https://www.astralcodexten.com/p/come-on-obviously-the-purpo...
I have always considered the following to be basically synonymous:
* In the absence of info, consider the intended output of the system to be what it is measured to be
* The output of the system is best determined using observation vs reasoning
Most of the examples there are moreso about two systems colliding. Yes, the purpose of the military is to disable the enemy and by god they are disabling a lot of each other so much so that they don't seem to be doing much else.
Except the bus system, in which the purpose is indeed to turn fuel into exhaust, because the busses move whether they are full or not. The purpose of busses is to drive around, and it so happens people like to use them. If the purpose of busses was to shuttle people around, it could be done several other better ways.
If the purpose is to gamble, it can be done many other ways. This system seems purpose-designed (or purpose-emergent) to coax out secret information in the form of large bets.
Selecting a single measurement is the same as selecting a purpose.
Either way, we see people can choose a nonsense root cause, to argue something specious by defining a nonsense POSIWID.
There's also a crossover with the human tendency to try and attribute causes to the bosses of a system. Sometimes systems are emergent and are not designed/run by any specific person. Especially when hallucinating benefits to specific people e.g. "follow the money". I'd like to define this as "agentic reification of emergent systems" however unfortunately modern times are creating noise around each of those words.
In general I find it interesting to see how people argue about systems. From what I see, very few people understand the systems they comment upon - instead most people rely on political memes and shallow analysis instead of any deeper rational thinking. I've been decomposing my own thinking about mortgages for a while and I'm still terribly ignorant about that system!
Aside: and thank you: I found out about the Glowies meme while writing this comment, meme seeded by Terry Davis https://news.ycombinator.com/user?id=TerryADavis
What are you basing that one? And how is this supposed to work?
If you are an insider the incentive is to trade as soon as possible, lest some other insider beats you to the punch, or some conventional leak (or investigative journalist) spoils your party.
This is easiest to see, when there are multiple unconnected insiders: the first to trade wins. But even if you merely suspect another insider might exist, you have an incentive to trade first.
> And that's assuming that you can distinguish an insider from someone lying for the sake of market manipulation.
That's exactly the same as any other noise trader in financial markets, yes. Nothing specific about insider information.
Well, that's not an argument against prediction markets.
They could have exactly the same amount of traceability as regular financial markets, and still work well as prediction markets.
E.g. there's a 1-to-1000 bet for $1m today on Trump falling down the staircase. So markets read this and go crazy, buying up the stock. The next day, nothing happens and the markets go down. But somebody could have made billions betting on that.
Just because there's a small bid for 1-to-1000 on market, doesn't mean you can buy billions worth of contracts at that price.
I'm sceptical that prediction markets uniquely enable this. Like, if you want to bet on U.S. airstrikes in the short term, you could always buy oil options (or short exposed companies). If you're in for the long term, you're buying something that benefits from cheaper gas, e.g. an additives company.
Insider trading is illegal. And for trades that aren't technically insider trading, often having some information ahead of time isn't as useful as it seems. Markets are known to react unpredictably to news; sometimes they move the opposite way from what you'd think, especially over the mid-long term, and there are many other influences on the price.
With a prediction market though, if you know what'll happen in the world, you know exactly what you'll win in the market.
Only in some markets and in some jurisdictions and some of the time.
Eg until fairly recently 'insider trading' in commodities wasn't anything you were punished for in the US.
See https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_...
As the biggest social benefit securities markets provide is to enable raising capital this is a huge drawback and makes things worse for the general public.
Retail investors should be index funds anyway.
Until fairly recently there was no 'insider trading' you could get in trouble for in commodities in the US. That hasn't stopped non-insiders from trading in commodities.
Also, even if insider trading is legal, that doesn't mean your company needs to allow it: you can still punish your own employees for it, and eg claw back bonuses and sue for breach of contract and breach of fiduciary duty.
The main thing the (American) laws against insider trading does what private contracts can't do is to make the golf buddy liable, too.
In any case, American insider trading regulation is already laxer than French insider trading law. And it doesn't look like French companies have an easier time raising capital.
That does does not solve the problem as insider traders will still be shifting profit to themselves. You still need non-insiders (not necessarily retail investors) to make the market work - even for insider trading to work you need a non-insider to trade with.
> Until fairly recently there was no 'insider trading' you could get in trouble for in commodities in the US. That hasn't stopped non-insiders from trading in commodities.
Can you show that it had no impact on how non-insiders traded? How recently was recently?
> Also, even if insider trading is legal, that doesn't mean your company needs to allow it: you can still punish your own employees for it, and eg claw back bonuses and sue for breach of contract and breach of fiduciary duty.
A lot less of a deterrent, and a lot of people with access to inside information have a lot more to gain than to lose.
> In any case, American insider trading regulation is already laxer than French insider trading law. And it doesn't look like French companies have an easier time raising capital.
Both do have insider trading laws so both are probably good enough, and there are a lot of other variables.
It also makes sense for the people voting: by betting against the outcome they want, they end up either a) paying for getting things their way, or b) getting consolation payoff if the decision makers pick the undesired choice.
It turns out that play money prediction markets are just as good as the real money ones.
Imagine a jury or judge start betting on their own cases? $500 might not sway them, but $200,000 bets coming in from villain/victims' relatives might and they thereafter decide to enter the market and also influence (or force) a legal outcome. So it can be used as a stealth form of bribery if external parties seek to make it profitable for insiders to effectuate an outcome. So at what point should the bet switch over to play money?
And what happens if all that play money can one day be redeemed into a new coin?
So with the rise of prediction markets one can predict a subsequent rise in surveillance. Can you even flag a bet on PolyMarket?
"Khamenei out as Supreme Leader of Iran by March 31?" https://polymarket.com/event/khamenei-out-as-supreme-leader-...
There's almost $7m in volume there. But what if multiple Israel-aligned groups coughed up say $250m and bet "no" then that's like a bounty, right, for someone in Iran to effectuate a yes on the ground? Khamenei himself could step down too after involving himself in the bet and then use the proceeds to ensure his ongoing protection. I don't know. PolyMarket or PolyPay?
It's interesting how those markets avoid any language like "death," I assume to not give the obvious appearance of an assassination market, though death seems covered by "is prevented from fulfilling his duties".
if you're not the person-in-complete-power, your bet is really likely to be 'rigged' against you
I'd rather play dice or buy lotteries
But for big events/talked about stuff/etc ofc this is not true.
IIRC the original prediction markets existed to try and get as close as possible to finding the true answer to open questions. Someone willing to bet a lot of money on an outcome (because they have an edge/are very sure of an outcome) is the point, they're putting their money where their mouth is...
This is quickly becoming the point of them, at least insofar as they are enjoying an extremely favorable regulatory environment courtesy of the Trump crew.
> During the 2024 general election campaign, allegations were made that illicit bets were placed by political party members and police officers, some of whom may have had insider knowledge of the date of the general election before Rishi Sunak, the Prime Minister at the time, publicly announced when it would be held.
> ...
> In April 2025, the Gambling Commission charged 15 people with offences under Section 42 of the Gambling Act 2005, including Russell George, Tony Lee, Nick Mason, Laura Saunders, and Craig Williams. Trials are not expected to begin until September 2027 or January 2028.
You can already short sell a company and then cause trouble for them, eg with an anonymous phone call of a bomb threat or whatever.
Typically, the authorities will catch you, because they check suspiciously lucky traders. They can do the same with prediction markets.
> A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $2000 per game.
The outcome of a sports game isn't exactly important in the grand scheme of things. And no one is forced to bet on sports to hedge their harvest against the weather or something like that. It's all entertainment.
> The much worse example is the fact that you can make 100-1 odds on whether the US airstrikes Iran today... or How many times Pam Bondi says the word "China" in a press conference.
So? Don't participate in these particular bets then?
OK, and? The market is just paying them to make information about their decisions public.
If "Politician XYZ takes the day off and sits on the couch" were paying 100-1 odds, it wouldn't be such a big drama (although, again, the existence of the bet would still impact their behaviour)
This also isn't a theoretical issue that may happen - it dissapoints me that very few people know this but - on October 10th when BTC fell from $122k to $104k because of a trump announcement, someone created a short position 30 minutes before Trump announced 100% tariffs on Chinese imports and profited $200M USD.
In the context of legislating prediction markets or not, sports is not a concern at all.
Whether it's a net positive or negative for important shit like war and corruption, we'll see, but if it helps in the important stuff, but damages sports, sorry bud.
Second - even if you are not one of the millions of Americans that give a shit about sports, there is still a massive fraud implications just by the existence of crypto prediction markets. All it takes is one bad call to changed the outcome of game. The Superbowl last year had over $1 billion wagered on it.
If the odds sit at 97% NO for weeks or months, then 3 hours before the invasion an insider makes their play, you would have to be constantly monitoring this market, interpret that spike correctly as an insider trade, and be able to, in that very short amount of time, take actions that change the outcome for you, personally.
Doesn't seem like much of an upside to me.
On to the nuanced response:
>"First - I can not comprehend how you could possibly have a charitable interpretation on the war point and how it might have a net positive."
>"I would like to hear a single positive for being able to make BTC bets on killing people."
This has been marked by yourself as a single point, but there's two distinct asks here, which I believe you are conflating. The latter of which is easy to answer, the first one is clearly to be decided and no one knows at this time (and could go either way).
First you ask how it might be a "net positive", that is that its positives outweigh the negatives. Then you ask to hear a single positive. Forgive me for overspelling the obvious here if the contradiction is already clear, but I must dwell on this as it seems to be precisely what's causing you to "not comprehend".
It is trivial to show a single positive, it can be done so in two manners, first showing that a single positive is possible, and then a bit harder would be to argue that said positive is definitely a positive and not a negative, in isolation. On the first type, to merely show that an individual positive is possible, I could do so in three different manners, one which is on good faith and relevant to the actual events/discussion, e.g: "on assasination events, victims can get information on their safety and act accordingly.", the issue is that this might distract you into discussing the specifics of what I just said instead of following the greater argument. A second way would be to show an individual positive that is technically so, but obviously would not be used to argue anything else, which avoids the reader from being defensive, e.g: "It's fun for people to gamble". It's worth noting that this is a single positive in isolation. Thirdly, I can argue anything really, and it is at least a candidate, mere refutation the fact is irrelevant as we are for this point only considering that there could be positives: e.g: "It might solve AGI/string physics", even in the exercise of finding a silly positive effect, we nevertheless find that it's technically possible that prediction markets might fund scientific research.
On the second type, to show that such positive effect is actually positive, I don't think there's much grounds to deny here that there exist individual positive effects. So I won't try to waste much effort, here, I think a stronger argument would be to argue that the net effect is negative, which again is distinct from being able to point out a single positive.
Regarding the net effect of markets on war or assasination attempts, I do not hold an answer, do you? Do you know for a fact whether it's a net positive or a net negative? Somewhere in the US courts, legislation and lawyers there seems to be a different answer. The journalists and a large amount of readers seem to be of course against it, but they don't hold much more power or say in the matter than the bare minimum any citizen gets by democratic vote, and to that extent, the power they hold is just over the capability to affect legislation for companies that have a global audience, and are just headquartered in your country as a base of operations, and would immediately move to another jurisdiction, or give way to a competitor in another jurisdiction if the conditions were to turn too unfavourable.
Personally, I don't make bets on wars, or assasination attempts because of the possibility that they may cause negative effects, it is sufficient and I consider the burden of proof to be inverted, but by no means do I hold the belief that it is a net negative. And I still reserve the right morally and legally to participate in these markets if for some bad turn of luck I were to be caught in the middle of a war, in the same manner that I might reserve the right to own and bear arms.
You could probably hire a gunman for much less than $3bn. I don't know if the crypto markets are anonymous enough to get away with it though.
And I was told I was crazy.
Hahahahahahahahahaha. Nope I was right.
https://en.wikipedia.org/wiki/Sports_betting#Famous_betting_...
wouldn't surprise me to find out that even cavemen were manipulating outcomes of stone-throwing contests to earn some more meat.
So it would be interesting to measure the inefficiencies of various bets vs the total market value in that bet.
e: Although full disclosure, I did not pick apart the entire paper. Maybe it's buried in there.
i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.
I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket.
But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of bets placed?
In any case: Thanks for a very interesting paper!
I'm glad you enjoyed the paper :)
I think an additional table/graph of how large-bet performance vs small-bet performance would be interesting in general, as well as broken out by market type.
It kinda answers of the question: Are large bets equal to smart money? or are they equal in "smartness" to small bets?
For example, one of the top trending ~~bets~~ markets right now is on whether Miami or Indiana will win the NCAA football championship tonight. You can either take "Yes" on Indiana at 74c, or "No" at 27c, or you can take "Yes" on Miami at 27c or "No" at 74c. Or, there's another potential outcome - you can also bet on a tie at 10c yes/91c no.
Is this research suggesting that an optimistic Miami fan can somehow get a better return by buying "No" on Indiana than a "Yes" on Miami?
Why is Kalshi structured with these yes vs. no options for all outcomes?
it's basically how they do margin. otherwise you wouldn't be able to sell / post asks without already having a long position. for kalshi, it's actually one single security in the background they just present it as two order books (but really it's one). for polymarket, they are two distinct products that trade separately, and technically could have arbitrage between them. although in practice they're normally priced correctly to sum to 1 (or 1.01)
Edit: it looks like the tie market is only for if the game is tied at halftime, which makes much more sense
I have to say I was this huge fan of the idea and I didn’t anticipate it would happen like this.
And then I go back to the home page, and see all the rabid sports fans, and realize that these bets are not being placed by deep thinkers.
https://polymarket.com/event/will-jesus-christ-return-before...
Buying “Christ doesn’t return” at 99 cents right now would be unprofitable, you will wait a year or so to “profit” 1 cent.
The then credible sources did not believe Jesus was the Christ at the time of the first coming!
If there was a second coming what would money be worth?
What exactly are people betting in this thinking? Just betting on anything with long enough odds?
https://www.cookpolitical.com/analysis/senate
Portrayal to the contrary is mostly due to non-experts pumping their own ego, or deliberate media spin.
1. The article mentions the bid/ask spread for contracts, but I believe that Kalshi also has its own fee structure. Small edges (an expected loss of 0.57¢ on a 1¢ contract implies an expected gain of 0.43¢ on a 99¢ contract, or a 5.75ppt edge) can be easily eaten by even small fees, and liquidity provision is all about small edges.
2. The article ignores the time value of money, and contracts take time to resolve. If a contract won't resolve for six months and the risk-free rate is 5%, then buying a "sure thing" over 97.5¢ is a loss net of otherwise earnable interest.
3. Long shots offer greater implied leverage to bettors, making them more attractive. This is still (sometimes) an exploitable mispricing, but it's closer to the well-understood "bet against beta" factor.
(Edit to add) Also, I think their explanation of the non-returns on finance is lacking:
> Why is Finance efficient? The likely explanation is participant selection; financial questions attract traders who think in probabilities and expected values rather than fans betting on their favorite team or partisans betting on a preferred candidate. The questions themselves are dry ("Will the S&P close above 6000?"), which filters out emotional bettors.
Financial contracts are the ones that are most perfectly hedges with existing markets. "Will the S&P close above X?" is a binary option, after all, so it's comparatively easy for a market-maker to almost perfectly offset their Kalshi positions with opposite positions in traditional markets.
As I read it, the implication is that a market maker in the high-P regime needs to still have an expected edge of 1.75% to profit net of fees, which means that the 'maker return' table in this article is net negative after fees for all categories save for entertainment, media, and world events.
I will also add to the 2nd point that some of these platforms due give fixed interest to positions in unresolved markets.
Edit to add that on non eligible markets your theory is correct, for example: https://polymarket.com/event/will-jesus-christ-return-before...
There's another idea, which is make contacts that pay out in shares of an ETF, but I haven't seen this idea put into practice
Of course in practice, there are issues like low trading volume, market manipulation, etc. And whether or not a particular market is performing better than, say, super-forecasters or experts in a given field is an empirical question.
That said, it seems a bit excessive to dismiss prediction markets as merely gambling platforms that add no value to society.
I get that the finance market is _more_ dry and quantitative than sports, but certainly not immune to hope and tribalism,
where is your paper?
And the people losing their life savings on gambling now have one more tool.
But what do I know. I’m probably oblivious to what greatness those Truth Engines will enable.
For instance, if you spot malware in a commit you could bet heavily against it being merged, and that would attract the maintainers' attention, and they'll see what you see and not merge it, and you get paid for the code review--that money would come from whoever bet that it would get merged, which you could require be the author of the malware. I haven't worked it out entirely but it seems that there are opportunities to build games that reward dilligence and transparency and penalize deception and spam.
This thought experiment took part in a world where the web was significantly worse than our own: hoards of malicious AI's and precious few humans trying to not be mistaken for a malicious AI. Of course a pre-existing trust relationship is much better, but ideally there'd be a way for untrusted authors to make it through to a real human somehow. Attaching money to the commit would be one way to do that.
Similarly, betting that a public figure will still be alive a month from now is functionally equivalent to putting out a hit on him.
As far as using prediction markets to put a hit out on people... How does that differ from how it's done now, except that the flow of money becomes part of public record where it's more likely to appear as evidence against you in court?
Anyhow, like most online media, moderation will be necessary. If we can't game-theory our way to a nice solution, we can just do the normal thing and ban the activity we don't like. I just think that where possible, designs that align incentives are likely to be more successful. Prohibition is generally ineffective, expensive to maintain, or both.
In the case where you're betting heavily in favor of a commit, maybe because you've reviewed it and think it's good, maybe because it contains malware you want to inject... you'd be attracting reviewer attention to that commit because if they can talk the maintainers out of it they end up with more of your money.
Probably the best strategy for a malicious committer would be to sneak through a low value nothing-to-see-here commit, because the low bet would not attract extra reviewer attention, so the maintainers have to set it high enough that it still incentivizes review.
I don't want to live in this world, by the way, I'm just afraid we might have to.
I imagine a hard problem is building a system to resolve these markets.
Could you use inefficient markets as a predictor of great volumes of insider trading?
dataset: 72.1m trades and $18.26b volume on kalshi (2021-2025)
core findings:
longshot bias: well documented longshot bias is present on kalshi. low probability contracts are systematically overpriced. contracts trading at 5 cents only win 4.18% of the time.
wealth transfer: liquidity takers lose money (-1.12% excess return) while liquidity makers earn it (+1.12%).
optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value.
category variation: finance markets are efficient (0.17% maker-taker gap) while high-engagement categories like media and world events are inefficient (>7% gap).
mechanism: makers do not win by out-forecasting takers. they win by passively selling "yes" contracts to optimistic bettors
This is interesting and makes a statement about positive or negative orientation in human psychology. Also, couldn’t the bets just be worded in the double negative instead of the affirmative to influence the optimism bet?
> Yet on Kalshi, a CFTC-regulated prediction market, traders have wagered vast sums on longshot contracts with historical returns as low as 43 cents on the dollar.
On prediction markets traders can bet both sides. E.g. on Polymarket I can currently bet that Greenland will be acquired by USA before 2027 and get 4:1 odds: or I can bet that this doesn't happen, and give 4:1 odds. If these odds are off, doesn't this mean that one side gets a bad return on investment, however the other side gets an equally good return?
On balance the average return on investment by traders should just be 100 cents minus the margin of the prediction market, which tends to be only a few percent.
In fact traders have to be there for both sides. The article means approximately that on 1c bets on unlikely things the people betting 1c to get a dollar if it happens do worse than those betting 99c to make a dollar if it doesn't happen.
I'm not sure that means betting 99c to make a dollar is a great business though - your money is tied up, often the volume is low so if you can only bet say $99 to win $100 it may not be worth the hassle to make $1, and you are vulnerable to the bettors knowing something you don't - maybe the unlikely event isn't really that unlikely but you don't know.
In the "The Mechanism of Extraction" section, how is that image made? It is nicely laid out, and has a nice "hand-drawn" feel. This is a good format for many technical drawings, but I have not found any tools that could create this.
In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run.
Slots are also unskilled games, prediction markets clearly some participants have a clear market edge, thus not efficiently priced.
> Takers pay a structural premium for affirmative "YES" outcomes while Makers capture an "Optimism Tax" simply by selling into this biased flow.
It's still operating like a casino in that there's a "house edge" that comes from taking bets. Unlike a casino, there is nothing stopping the average person from market making, which is why it doesn't make sense this structural inequality exists.
This is basically equivalent to the observation that, in a perfectly efficient market, no entity can ever make a profit.
And yet, in the real world, entities make profits all the time. In fact, they make wild, unimaginable, world-changing, history-altering profits. This is a tacit admission that our markets aren't even remotely efficient, and that includes predictions markets. Efficient, rational markets are the exception, not the rule.
In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.
Instead in an efficient market everyone is already occupied making X ROI and gives as much up by entering a new market as they gain.
Put another way, if you already own a sock with 10% ROI, you can sell it and buy a sock with 10% ROI but the transaction is pointless so it doesn’t occur.
> An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question.
Perfect information means something different here. In Chess both players have perfect information of the game state, they don’t know the future. Poker has randomness and imperfect information but there’s other games with randomness and perfect information.
If people knew more about economics than just whatever is being parroted as 'economics' in mainstream media they would know that there's a variety of types of markets that happen in the real world and none of them are the abstraction of a free market that allows econ 201 students to compare what happens when you introduce trade between a country that produces 4 apples for 3$ each and a country that produces 5 oranges for 4$ each.
If the odds in some financial products are worse than gambling while everyone can access gambling, then people should stop making a distinction under the guise of protecting investors
it just drives investors to actual gambling because they cant get the exposure they were already looking for
This argument gets trotted out by Wall Street every decade or so, usually under the guise of "democratising" some piece of finance. It's almost always bunk.
Most investment capital is looking for safe returns. It's not competing with gambling. Even within the high-risk end of finance, the game is in turning that high risk into above-market but predictable returns through portfolio mechanics. (Fuckups aside, you can't generally portfolio mechanic your way out of the negative expectated value of a lottery ticket.)
More simply: the notion that we need to increase risk and profitiabilty for intermediaries in investments to keep people from gamblig is a false economy. Gamblers are seeking a different thrill from what financial markets are designed to provide. To the degree we have a problem, it's in letting our markets look more like casinos.
> exposure they were already looking for
Broadly speaking, if you want exposure to the economy you're investing. If you want exposure to a number that goes up, you're gambling. This is an overly-simplistic delineation. But it works for first-order estimates.
I'd almost agree if the volume on $SPY zero day options wasn't so immense.
Which isn't even tied to the spot price of VIX on a daily basis.
So buying VIX as a hedge against black swan events (or Donald Trump's stupidity) is a losing trade, which is wild to me.
The states regulate gambling and the feds only protect the state's rackets by restricting online gambling, and the feds regulate financial markets that are not considered gambling, we get it, its two different governments that don't see the silly user experience they've created and are both very passionate about what they do. The people regulating the financial markets think they are doing a noble good by protecting people from losing their money, and now, fast forward to the present, neither are the regulators of sports betting
I didn't write this about sports gambling or event markets and I don't care about that particular subset. There are many many many markets and financial products either accessible or not, in this paradigm
The user experience is stupid when the dumbest trades are still available after the investor has been protected
The capital wants to move so let it move
The regulators should continue mandating transparency and keeping markets operating predictably, but they need to get out the way of approval or denials of financial products or access to them, because its redundant and silly