For long term markets, there is a well known interest rate/opportunity cost problem, which prevent markets that have a low (or high) probability from getting priced correctly. Furthermore, the resolution crtieria for many of these markets are extremely subjective and involve an author claiming that “democracy is over as we know it” when potentially common things would count here.
I also didn’t understand it. I researched it, and I think this is the more in-depth explanation:
Long-term markets with very low or very high probabilities aren’t correctly priced because of opportunity-cost dynamic. For example: events that should trade at 2% stay at 5% OR events that should be at 98% stay at 95%. Everything gets pulled toward the middle because the opportunity cost of tying up money for years makes it not worth fixing the mispricing.
For a low-probability event priced at 5%, a trader who thinks the true probability is 1% would have to bet “No” and lock up their money for, say, four years to make a small profit (on a market at 5% they invest 95 cents to maybe win 5 cents profit over four years). This small return is often less than what they could earn from safe interest elsewhere or from betting on shorter-term markets.
For long term markets, there is a well known interest rate/opportunity cost problem, which prevent markets that have a low (or high) probability from getting priced correctly. Furthermore, the resolution crtieria for many of these markets are extremely subjective and involve an author claiming that “democracy is over as we know it” when potentially common things would count here.
I also didn’t understand it. I researched it, and I think this is the more in-depth explanation:
Long-term markets with very low or very high probabilities aren’t correctly priced because of opportunity-cost dynamic. For example: events that should trade at 2% stay at 5% OR events that should be at 98% stay at 95%. Everything gets pulled toward the middle because the opportunity cost of tying up money for years makes it not worth fixing the mispricing.
For a low-probability event priced at 5%, a trader who thinks the true probability is 1% would have to bet “No” and lock up their money for, say, four years to make a small profit (on a market at 5% they invest 95 cents to maybe win 5 cents profit over four years). This small return is often less than what they could earn from safe interest elsewhere or from betting on shorter-term markets.