Betting markets are the gold standard of expert predictions because bets are the ultimate test of what people truly believe.
The best betting markets are highly liquid. A liquid market is one where you can place a large bet without moving the price very much. Liquid prediction markets work when no individual person can influence the outcome. Bettering markets are a great way to find out if "it will rain tomorrow" or whether "candidate x will be elected president next year".
But what if a single person can influence the outcome? For example, what would happen if I created a betting market for "Lsusr will publish a blog post tomorrow"?
Suppose I am ambivalent about whether I will publish a blog post tomorrow. If the price of "Lsusr will publish a blog post tomorrow" drops below 1.00 then I will buy shares of "Lsusr will publish a blog post tomorrow" and then pocket a risk-free profit by posting a blog post tomorrow. If the price of "Lsusr will publish a blog post tomorrow rises above 0.00 then I will buy shares of "Lsusr will not publish a blog post tomorrow" and then pocket a risk-free profit by not posting a blog post tomorrow.
The market equilibrium occurs even if I am unaware that the prediction market exists. Suppose the price drops to 0.99. A trader could buy shares and then pay me a small fee to influence the outcome.
I am not truly ambivalent. Suppose I'm willing to influence the outcome in exchange for $500. What happens? If the market liquidity is less than $500 then we have a functional prediction market. If the market liquidity is more than $500 then we have a regular market.
Prediction markets function best when liquidity is high, but they break completely if the liquidity exceeds the price of influencing the outcome. Prediction markets function only in situations where outcomes are expensive to influence.
If it gets to 99.9%, you STILL can't make a profit by switching sides - you're too heavily invested on the "yes".
Why not? If you sell your yes shares, that seems like a guaranteed profit to me? Are you assuming very large transaction costs or something?
Like let's make it dead-simple:
The market sells contracts that pay $100 if you make the post, and pay nothing otherwise.
Initially the market price is at $1. This means you can earn $99 by buying a contract and the making a post, which sounds like a cost-effective way of spending your time, so you buy a contract. This increases the price, maybe to $2, maybe to $50, depending on the liquidity. (It sounds like you prefer the high-liquidity limit?)
The market somehow finds out about your plan, maybe by watching the prices, maybe because you announced your intention on social media, maybe for some other reason, so they conclude that you will make the post and therefore bid up the contract to $99.
Now you could make the post and earn a total profit of $99. But you could also just sell the contract at the current market price, yielding a guaranteed profit of $98, which is less risky and requires less work.
It sounds you are saying that this story fails at step 4, because you are saying that one couldn't make a profit in this circumstance due to being "too heavily invested on the "yes"". But I don't see how you're too heavily invested in the yes; it's true that you've got a "yes" contract, but you bought it at $1 and the market price is now $99, so you can sell it and make a profit of $99-$1=$98.
Betting markets are the gold standard of expert predictions because bets are the ultimate test of what people truly believe.
The best betting markets are highly liquid. A liquid market is one where you can place a large bet without moving the price very much. Liquid prediction markets work when no individual person can influence the outcome. Bettering markets are a great way to find out if "it will rain tomorrow" or whether "candidate x will be elected president next year".
But what if a single person can influence the outcome? For example, what would happen if I created a betting market for "Lsusr will publish a blog post tomorrow"?
Suppose I am ambivalent about whether I will publish a blog post tomorrow. If the price of "Lsusr will publish a blog post tomorrow" drops below 1.00 then I will buy shares of "Lsusr will publish a blog post tomorrow" and then pocket a risk-free profit by posting a blog post tomorrow. If the price of "Lsusr will publish a blog post tomorrow rises above 0.00 then I will buy shares of "Lsusr will not publish a blog post tomorrow" and then pocket a risk-free profit by not posting a blog post tomorrow.
The market equilibrium occurs even if I am unaware that the prediction market exists. Suppose the price drops to 0.99. A trader could buy shares and then pay me a small fee to influence the outcome.
I am not truly ambivalent. Suppose I'm willing to influence the outcome in exchange for $500. What happens? If the market liquidity is less than $500 then we have a functional prediction market. If the market liquidity is more than $500 then we have a regular market.
Prediction markets function best when liquidity is high, but they break completely if the liquidity exceeds the price of influencing the outcome. Prediction markets function only in situations where outcomes are expensive to influence.