This is a good post. I think that in practice the inflation/opportunity cost consideration is by far the biggest effect here. Some reasons:
It applies a definite bias in the same direction to all long term markets (pushes them away from the extremes). Hedging might result in a one sided distortion in some cases, if really cold temperatures are bad for crops but not the other way around. But not every hedge-able market has the exact same distortion
It affects the decisions of all bettors on all markets. Whereas other distortions only apply to a niche subset such as Spanish farmers or the overly risk averse
Importantly, it impacts the decisions of more skilled predictors more strongly. This is because they can expect a higher return on average, so they have a higher opportunity cost.
E.g. for an unskilled predictor looking at a market that resolves in 1 year, they might only bet if they expect to make over a 10% return; so if their probability estimate falls outside a narrow band close to the market price it still makes sense for them to bet. But a skilled predictor might be making 50% a year on average, so a much wider range of probabilities are wiped out.
This is a big effect on Manifold because the top predictors tend to double their money every few months, so there is not much incentive for them to bet on markets longer than a year[1] unless they have a very large edge. I’m not sure how much this effect applies to real money markets
This is a good post. I think that in practice the inflation/opportunity cost consideration is by far the biggest effect here. Some reasons:
It applies a definite bias in the same direction to all long term markets (pushes them away from the extremes). Hedging might result in a one sided distortion in some cases, if really cold temperatures are bad for crops but not the other way around. But not every hedge-able market has the exact same distortion
It affects the decisions of all bettors on all markets. Whereas other distortions only apply to a niche subset such as Spanish farmers or the overly risk averse
Importantly, it impacts the decisions of more skilled predictors more strongly. This is because they can expect a higher return on average, so they have a higher opportunity cost.
E.g. for an unskilled predictor looking at a market that resolves in 1 year, they might only bet if they expect to make over a 10% return; so if their probability estimate falls outside a narrow band close to the market price it still makes sense for them to bet. But a skilled predictor might be making 50% a year on average, so a much wider range of probabilities are wiped out.
This is a big effect on Manifold because the top predictors tend to double their money every few months, so there is not much incentive for them to bet on markets longer than a year[1] unless they have a very large edge. I’m not sure how much this effect applies to real money markets
There is a loan system which helps with this somewhat, but also increases your risk exposure so it’s not clear what the overall effect is