I think monied prediction markets are negative EV. The original reasons the CFTC were not allowing binary event contracts on most things are/were actually good reasons. It’s quite clear that our elected officials can get away with insider trading (and probably to a certain extent market manipulation). My intuition is that in the current admin I expect this behavior to increasingly not be punished and maybe actively encouraged. Importantly, insider trading on the existing financial instruments doesn’t really work. My take here is just that the marginal value of a piece of information is pretty low for traditionally financial markets, so while it might allow a high-tech research shop to beat the market it doesn’t even cover slippage/the lack of complex modeling done when in the hands of a dumb paper congress person. This is not the case for most/all binary event markets, where a single marginal piece of information can credibly flip probabilities from <1 → >99.
Insider trading, which I expect to be much more likely to happen at scale with these markets, is not that bad. It degrades the integrity of the prediction markets themselves and might lower volume but probably not that relevant for EA. However market manipulation could get reallyreally bad in terms of EV (I think significant market manipulation is currently quite unlikely at the current levels of liquidity on these markets). In particular, the less likely something is to happen, the more incentive a prediction market provides for manipulating the market. And like in insider trading, I think market manipulation is going to be much more accessible and effective for generating alpha vs traditional markets.
low stakes example: Trump’s speech writer puts random phrase ( Lock x up, I hate x country, Sperm)
Of course with the medium and high stakes examples, we are far from the liquidity on these markets to make the incentives provided to be worth seriously considering. But what if we 100x? what if e.g. mamdani could make 50 million dollars by dropping out instead of 500k? What if trump could make 20m by delaying a ceasefire a few days?
To some extent we will just have to see how the enforcement of this stuff plays out as that will shape the incentives. It might seem obvious that the stuff above will be easily sorted out by the relevant federal bodies. Again, my intuition is that (1) I don’t actually expect this to be a huge priority right now and (2) the regulatory burden to properly regulate this stuff is ridiculously high (both in terms of just tracking everything that is happening and actually trying to apply the law to decide if various things constitute as “security fraud”).
It’s already hard for the SEC to enforce behavior the NYSE or CME, and that’s with mostly big institutional players who cooperate and record all their communications, etc. I’d have to imagine especially in the short term the vast majority of questionable or illegal behavior on prediction markets will slip through the cracks. The space of potential “securities fraud” is just so ridiculously big and confusing when you have 1000s of random binary event contracts.
Then you put that with the encouragement of gambling and incentivizing the spread of fake news, I just think we should be very very skeptical of going head first into this.
And the alternatives are pretty good! Non monied prediction markets like manifold and metaculus are huge improvements over previous epistemics, and to be fair the monied prediction markets are quite literally crowding them out. It’s not really fair to compare polymarkets accuracy to manifold, when a bunch of people who are on poly would probably use manifold if they made poly illegal (and that being said I’m pretty sure manifold doesn’t stack up to poorly but don’t have up to date stats). And some of the most important binary event contracts were already being traded on CME because they didn’t suffer from the issues I listed above.
Given the public good nature of prediction markets, the government should be quite willing to front $10s-100s of millions to improve their quality. And there are lots of ways to improve the markets without directly providing personal monetary incentives. This could mean improving the site ui/ux, creating a public leaderboard with some sort of recognization/award, improving the question statements/resolution, or even providing prizes that can be donated to a charity of the winners choice.
I think monied prediction markets are negative EV. The original reasons the CFTC were not allowing binary event contracts on most things are/were actually good reasons. It’s quite clear that our elected officials can get away with insider trading (and probably to a certain extent market manipulation). My intuition is that in the current admin I expect this behavior to increasingly not be punished and maybe actively encouraged. Importantly, insider trading on the existing financial instruments doesn’t really work. My take here is just that the marginal value of a piece of information is pretty low for traditionally financial markets, so while it might allow a high-tech research shop to beat the market it doesn’t even cover slippage/the lack of complex modeling done when in the hands of a dumb paper congress person. This is not the case for most/all binary event markets, where a single marginal piece of information can credibly flip probabilities from <1 → >99.
Insider trading, which I expect to be much more likely to happen at scale with these markets, is not that bad. It degrades the integrity of the prediction markets themselves and might lower volume but probably not that relevant for EA. However market manipulation could get really really bad in terms of EV (I think significant market manipulation is currently quite unlikely at the current levels of liquidity on these markets). In particular, the less likely something is to happen, the more incentive a prediction market provides for manipulating the market. And like in insider trading, I think market manipulation is going to be much more accessible and effective for generating alpha vs traditional markets.
low stakes example: Trump’s speech writer puts random phrase ( Lock x up, I hate x country, Sperm)
medium stakes: Every election market is an assassination market, and a bounty for either candidate to drop out
High stakes: “will x leader/country bomb y”
Of course with the medium and high stakes examples, we are far from the liquidity on these markets to make the incentives provided to be worth seriously considering. But what if we 100x? what if e.g. mamdani could make 50 million dollars by dropping out instead of 500k? What if trump could make 20m by delaying a ceasefire a few days?
To some extent we will just have to see how the enforcement of this stuff plays out as that will shape the incentives. It might seem obvious that the stuff above will be easily sorted out by the relevant federal bodies. Again, my intuition is that (1) I don’t actually expect this to be a huge priority right now and (2) the regulatory burden to properly regulate this stuff is ridiculously high (both in terms of just tracking everything that is happening and actually trying to apply the law to decide if various things constitute as “security fraud”).
It’s already hard for the SEC to enforce behavior the NYSE or CME, and that’s with mostly big institutional players who cooperate and record all their communications, etc. I’d have to imagine especially in the short term the vast majority of questionable or illegal behavior on prediction markets will slip through the cracks. The space of potential “securities fraud” is just so ridiculously big and confusing when you have 1000s of random binary event contracts.
Then you put that with the encouragement of gambling and incentivizing the spread of fake news, I just think we should be very very skeptical of going head first into this.
And the alternatives are pretty good! Non monied prediction markets like manifold and metaculus are huge improvements over previous epistemics, and to be fair the monied prediction markets are quite literally crowding them out. It’s not really fair to compare polymarkets accuracy to manifold, when a bunch of people who are on poly would probably use manifold if they made poly illegal (and that being said I’m pretty sure manifold doesn’t stack up to poorly but don’t have up to date stats). And some of the most important binary event contracts were already being traded on CME because they didn’t suffer from the issues I listed above.
Given the public good nature of prediction markets, the government should be quite willing to front $10s-100s of millions to improve their quality. And there are lots of ways to improve the markets without directly providing personal monetary incentives. This could mean improving the site ui/ux, creating a public leaderboard with some sort of recognization/award, improving the question statements/resolution, or even providing prizes that can be donated to a charity of the winners choice.