# Betting and prediction markets

## Market design for good guesses

A couple of notes to the mechanism design questions for how to predict the future, but mostly tips on the practicalities of getting one’s hands dirty.

Lesswrong’s prediction markets wiki entry:

People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants.

It also has some useful links to explanatory blog posts. I cannot find a whole lot eof published academic research in this area. Curious.

If I bet on a nuclear war, and win, how exactly am I getting paid?

These signals are of course noisy - see some nice plots from David Rothschild via Andrew Gelman.

Making markets doesn’t only work on binary propositions, it also works on quantities. For quantities you quote a market as well as a conversion factor for the contract’s pay-out, for example “I’m 8 at 30 for the number of people who show up to my talk, $2 per person”. That would mean I’m willing to buy a contract that pays out$2 for everyone who comes to my talk for $16 (8 people times 2 dollars/person) and sell such a contract for$60 (30 times 2). If I sold such a contract, and then 34 people came to my talk, I’d need to pay out \$8 on net.

## Examples

Metaculus is a prediction market without currency apart from reputation. I don’t have sufficient OCD for that.

Bitedge explains betting exchange mechanics and bet arbitrage and offers reviews. e.g. here they test the customer support for betbtc. betonline.ag is another one I see around.

Only a few of these markets offer service in Australia, for reasons that are unclear to me.

Filimonov, Vladimir, and Didier Sornette. 2012. “Quantifying Reflexivity in Financial Markets: Toward a Prediction of Flash Crashes.” Physical Review E 85 (5): 056108. https://doi.org/10.1103/PhysRevE.85.056108.

Garip, Filiz. 2020. “What Failure to Predict Life Outcomes Can Teach Us.” Proceedings of the National Academy of Sciences 117 (15): 8234–5. https://doi.org/10.1073/pnas.2003390117.

Schlenker, Wolfram, and Charles Taylor. 2019. “The Market Is Betting on Climate Change.” VoxEU.org. May 2, 2019. https://voxeu.org/article/market-betting-climate-change.

Taleb, Nassim Nicholas. 2018. “Election Predictions as Martingales: An Arbitrage Approach.” Quantitative Finance 18 (1): 1–5. https://doi.org/10.1080/14697688.2017.1395230.

Thorp, Edward O. 2006. “Chapter 9 the Kelly Criterion in Blackjack Sports Betting, and the Stock Market.” In Handbook of Asset and Liability Management, 1:385–428. Elsevier. https://doi.org/10.1016/S1872-0978(06)01009-X.