I Championed Prediction Markets. Look What They've Become
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But it also reminds me that prediction markets are one of those things that are transparently a terrible idea because they create problematic incentives, and not just because people ruin their lives gambling. If you can make $1 million by triggering something that or getting somebody to trigger something that basically has no business happening, whether it's stripping on the Senate floor, causing a volcano to erupt, or crops yields to reduce by secret herbicide dusting, or any other bologna, somebody will do it if the balance makes it worthwhile. Likewise, they give people reasons to vote that are negative - "I have $100 on prop XYZ passing, of course I support it." (Though side note: the ubiquity of betting being super terrible for society because people can't handle gambling at all is one of those things that I've been super surprised by that seems to have good evidence now. I guess because gambling mostly just doesn't do it for me to the degree that I find it shocking just how addictive it is and just how much it exacerbates bad situations for many people.)
And I can't see how there's any benefit that's bigger than the problems. If prediction markets are better than Nate Silver, why is it worth all the problems to society for that extra accuracy margin? I can see why individual actors might find value, but I don't see how their value accrues to society in any way that makes it worth it.
People mostly don't do this because most of the things which you could do to move a stock price are highly illegal, and anyways there are laws against market manipulation. And I doubt people vote to benefit their portfolio (except for homeowners) because there's so little chance that any individual person's vote will result in a tangible benefit to the corporation. People mostly vote out of a sense of duty; the chance of your vote individually actually changing a tangible outcome is miniscule.
The problem seems to be in what it's used for. Prediction market supporters never intended it to be used primarily for sports gambling, much less used to override state sports gambling laws at the federal level. That was never part of the original proposal for prediction markets. I can see a legitimate use case for e.g. the Fed using conditional prediction markets to inform monetary policy; in that case, even a small increase in marginal accuracy/certainty could plausibly be worth billions of dollars to society.
Everyone here seems so sure that they knew prediction markets were a bad idea. But it seems to me that most of the harm comes from the CFTC regulated securities loophole. Without that, prediction markets on sports would be limited to states where sports gambling was already legal, and the marginal harm would be minimal. And I didn't see anyone predict that mechanism; if they did, they never got much traction. This is exactly the sort of problem prediction markets, in their ideal form, are meant to solve.
> I don’t claim to know the exact right policy answer for America. But I know we never even had a grown-up debate.
If you've seen the destruction caused by something and can't figure it out, maybe you have a problem?
And let's be honest: the idea of "debating" things that are obvious is often one of the primary ways by which indefensible things are legitimized.
Your advice might work in a different world.
It would be dishonest to ban prediction markets without banning stock markets.
The best which can be done, under the current system, is to punish unfair information asymmetries, which is practically impossible to do reliably... And even if we could find a way to punish it reliably; what would happen is that most rich people would end up in jail. Information asymmetry is almost never fair and it's how people make big money these days.
I think the best solution is to create conditions to allow people to earn big money in other ways; ways which create value. If there were other ways to make big money besides unfair information asymmetry, then skilled people would find it easier to do that instead...
Unfortunately, skill/talent does not allow you to gain an information advantage; only social connections do. So the current system is really bad in terms of wasting specialized skills/talents... Current system takes talented people and re-orients them towards adversarial games of deception where they're just a number in a sea of increasingly desperate untalented people who are better at playing the deception game... And the talented folks eventually lose their talents through lack of practice; they're so focused on learning ways to trick people and algorithms, that their actual talents atrophy; by the time they become well known, if they ever do (most don't), they've become mediocre; corrupted by their participation in the process of trying to become relevant; their main talent always takes the back seat.
How to ban trading? You could heavily addon tax profits from short term trading under 3 months at 90% say, tapering to zero as time increases maybe 2 years. With zero ability to offset any losses with other tax forms.
Shorts, options et. included unless it can be proven as part of a bigger trade or insurance but then apply to bigger trade.
This could also apply to market makers making that closer to a public service.
Now we have a small number of extremely influential people who are essentially bribing and propagandizing the masses into voting them more money... Each win gives them even more money to buy even more votes at the next election.
Politicians change but the people behind them keep accumulating more wealth.
Democratization of wealth creates massive capital centralization which creates anti-competitive dynamics; the monetary playing field is itself inherently anti-competitive by design.
I often give the example of a skilled coffee shop owner having to compete with a coffee shop 'pet project' of a multimillionaire passive investor who is running their shop at a loss... The person without passive income cannot win no matter how much better they are.
Now extend this metaphor to every aspect of the economy. There will be two kinds of businesses remaining; monopolistic megacorps receiving government handouts and small businesses which would all be some millionaire shareholder's unprofitable pet project.
Also, the biggest shareholders of various companies are using their leverage to find anti-competitive synergies between companies in their portfolios and coercing the executives of certain companies into favoring specific suppliers and clients on that basis.
Edit: and with prediction markets you don't own anything. Even with commodity futures you can end up having to take possession of cows or something.
Insurance was illegal at different times in history because it was considered gambling. Ditto for commodity trading.
Even you look at the structure of a futures contact, the basics look really similar to a bet that can be traded with someone else.
The main differences are the regulatory environment, and the intention the actors in the market have.
Commodities, options, and futures are all legitimately used to hedge against future outcomes. The "gamble" (placing money on a future outcome) is a mechanism for the main goal: protection against instability.
When you look at stocks and - in particular - derivatives, it starts to look a lot closer to how gambling is structured. I'm pro stock market, but that doesn't mean I won't admit that the line between it and gambling is pretty hard to draw. It's a lot more grey than people give credit for
And it was, in fact, gambling. You could take out a life insurance policy on anyone without any relationship with them.
It did a better job of predicting election outcomes than the polls. For markets without a cap, companies have used them to have against a politician that would pass policy that's can for their business.
This doesn't mean we should have them, but there is utility. It's just not worth the trade-offs
Basically, prediction markets are for public sentiment what free markets are for supply and demand. They create an emergent system that balances/optimizes variables across a large domain.
Prediction markets are obviously, blatantly, gambling. There is no "greyness", we've skipped the slippery slope and gone straight to the bottom of the ravine.
What neither I nor the author anticipated was that the easiest way to make the markets "efficient" was to rig them.
In hindsight it's obvious, but optimism is one of the most powerful blinders out there.
Wow, no you built an avenue for corruption, insider trading and problem-gambling, and you should have known this beforehand. Would have known it beforehand if you'd bothered to consult with non-economists.
Think about whether the spirit of the domestic/foreign emoluments clause would be okay with this. I'm sure some will argue there's enough layers of BS in this scheme that it's totally fine.
Ethics and judgement aside, I think startup founders can learn a lot from this administration as to how "successful" people twist things in their favor. The industry is full of it.
Anyone who is not an insider is a loser.
He is already so beyond the pale this doesnt even move the needle.
This was never, ever going to end well. There is no good use of "prediction markets".
Prediction markets are meant to be the stock market but for events besides the value of a certain corporation. They were co-opted as a thin veneer of legitimacy over deregulated sports gambling. The concept itself theoretically has some value, however insignificant compared to the damage caused by the current policy.
If you were playing in the World Cup in the lesser teams, very often betting+sabotage/plausible negligence would have been a more profitable enterprise for you than to actually do your best to win.
Stock markets have this problem too, but they are much more regulated, and even if manipulated by insiders, the blast radius is smaller and often auditable.
The corrupting influence they are having on society has been obvious from the start and was predicted by anyone with any familiarity of the effects of "traditional" gambling on people. Except the author apparently, because they had seen precisely what gambling can do to people and still pushed this.
"The dream was that markets would surface useful information"
The dream was that the markets would make the people who owned them stupid amounts of money like any casino owner. Pretending otherwise is self-delusion at it's finest but the author seems good at that.
In retrospect their misuse as a loophole for sports gambling was an obvious outcome. Seems like every promising new technology inevitably is used for evil. Cryptocurrency is mostly used for criminals. Social media displaced more meaningful forms of connection. We're already starting to see this with AI (psychosis, slop, assisting bad actors) but I'm afraid it will get much worse.
This isn't a 'benefit of hindsight' thing; a lot of people called this out in advance, just like all the other tech you listed.
We need to stop listening to the people who are wrong about everything, rather than pretending the maximalist seeking of profit with no regulation is a reasonable position. We know it doesn't work.
I understand that "Things would be great if they'd done it right!" is in some sense unfalsifiable. But also I think it's pretty clear that the current regime is geared solely towards maximizing the profits of prediction market companies and Trump Jr.
Basically, it depends on there being competent, good-willed people in power using them to inform their decisions. That feels like a bit of a joke right now, but things weren't always this way.
“Will there be another coronavirus mutation resulting in a pandemic in 2005, 2006, 2018, 2019…” doesn’t seem like it would have been helpful, except in the like two month or so window after detection and the WHO announcement when alarm bells were already going off but it still hadn’t diffused into popular consciousness yet.
Their track record is not great, and I don't think they fully realise that the issue is them: the principles and axioms they rely on don't lead to good results.
> I don’t claim to know the exact right policy answer for America.
Perhaps start by reversing your positions, and throwing support behind those trying to undo the damage you caused.
The author still thinks they were "freeing prediction markets from unnecessary restrictions", but clearly some restrictions are necessary, and totally free markets aren't actually an economic panacea. This is not really new information, so the flaw is in the thinker, not the data.
If your ideas are consistently proved harmful, acting against your instincts is a better play than continuing to trust them.
As far as I can tell, prediction markets went from totally illegal to basically unregulated. Presumably the author was arguing for a middle ground.
I would expect that if they didn't think they were unnecessary anymore, they would have said something like "I helped build the case for freeing prediction markets from restrictions that I thought were unnecessary". Their description of the predictions being unnecessary is still stated as a present tense fact (and the entire clause is in bold-face, making it clear that it's something they want to draw attention to).
The current admin has bungled better ideas than prediction markets.
No one "bungled" anything. They just aren't being prosecuted..yet.
Now I don‘t consider day trading to be gambling (even though it is packaged and marketed to appeal to and sell to gambling addicts). For it to be gambling, it would need to be a game.
It is something far more sinister and far worse then gambling. I consider it exploitation, or more accurately capitalist exploitation. This also applies other aspects of the stock market, even the ones which are not marketed to exploit gambling addicts, including investment backed retirement funds [401(k) in the USA], index funds, and publicly traded companies. To me, all these things are equally bad (well actually the retirement funds may be the most sinister of the bunch) even though day trading might have the ugliest manifestation. These are all exploitation of the working class.
It's skimming.
An anti-capitalist here: Yes... Oh heavens, yes. There are few things I desire more then to see all the stock markets in the world burn and never to be rebuilt. For me, people who make money at the stock market are participating in a systematic exploitation of the working classes. The siphoning of profits away from the workers who created them and earned them, and into the hands of the rich who contribute nothing, yet get everything.
Stock markets serve(d) a function as vehicles to invest in risky ventures. In other words, a way to channel investment.
In the average case scenario, removing the stock market results in rich people being the ones who can afford to fund projects, and thus owning the outcomes.
The underlying case would be for wealth concentration and therefore power concentration. Addressing that would give the working class more options to fund projects or work, more than being the right type of person in the right network to land a rich patron.
Maybe concentrate our efforts on undoing the damage this era of capitalism has wrought us, maybe starting with reinstating consumer protection, dismantling the state surveillance system, protecting against the effects of the climate disaster. If you have a good idea on any of those, run for office, or get a degree and work with your local (state funded) university on the matter.
The sucky rule about history seems to be - “is this better than what was there before.”
Equity markets can definitely be made more competitive, and being ungodly rich needs to be more expensive than it currently is.
Loans don’t work the same way as equity investments, because loans are essentially low risk tools. They have a fixed payoff every month/year, whereas something like an expedition or new product launch can recoup its investments only post a certain period, if at all.
As a result loans originators don’t invest in high risk ventures.
This is a rule of thumb, there are many instruments you can create which will fill the gap.
We definitely need more competition and user protection in markets (and in general). The pendulum has swung very far in favor of firms in the US, and that needs to be balanced.
What we need are boring and proven solutions. Lets start with boring old regulations, maybe boring old taxation, on top of boring old infrastructure build out (using proven technology; none of these modular small nuclear power plants; they don‘t exist and won‘t save us). And Finally boring old international agreements, this time without capitalist polluters polluting the agreements, just like the one which saved us from nuclear proliferation and the ozone layer depletion.
As for the status quo. The status quo is currently that the interest of the rich trumps everything. Climate inaction is the status quo because rich capitalists benefit from polluting, so governments simply allow them to continue. Risky ventures do nothing to stop that.
I don‘t care. First we need to address the urgent problem which is new carbon being released. Lucky for us that is also the easy problem. All we have to do is stop constantly catering to the interests of the rich. Let polluters become bankrupt if we have to.
mRNA vaccines were initially studied and developed in good old boring state funded universities, the stock traded research labs which did later develop them got state funded research grants. The stock market came nowhere near funding them until they were already proven. In fact publicly traded companies held patents and prevented a fair distribution of essential vaccines, leading to more people dying from COVID. Without the stock marked I am sure this technology would have been shared and lives would have been saved. Trading stocks in companies with mRNA patents was not about funding risky ventures, but about pandemic profiteering.
Alright, not worth discussing further with someone who doesn't actually have any solutions to issues, much less care about them in the first place. Have a good day and good luck with your philosophy.
Another shit hole of insider trading...