Betting and prediction markets

Market design for good guesses

August 12, 2017 — February 15, 2022

A couple of notes to the mechanism design and theory of how to predict the future through betting.

Popularly argued to be state-of-the-art for wicked tail risk estimation.

Figure 1

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 indexes some explanatory blog posts. I cannot find a whole lot of published academic research in this area. Curious.

Zvi, When do prediction work?:

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.

1 Examples

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

The Passage Of Polymarket

Only a few of these markets offer service in Australia, for reasons that are unclear to me. Do not bother telling me to use a VPN to access them; my bank account is still in Australia and that is how they check.

2 References

Filimonov, and Sornette. 2012. Quantifying Reflexivity in Financial Markets: Toward a Prediction of Flash Crashes.” Physical Review E.
Garip. 2020. What Failure to Predict Life Outcomes Can Teach Us.” Proceedings of the National Academy of Sciences.
Schlenker, and Taylor. 2019. The Market Is Betting on Climate Change.” (blog).
Taleb. 2018. Election Predictions as Martingales: An Arbitrage Approach.” Quantitative Finance.
Thorp. 2006. Chapter 9 The Kelly Criterion in Blackjack Sports Betting, and the Stock Market.” In Handbook of Asset and Liability Management.