lsusr's Shortform

lsusr

This is a special post for quick takes by lsusr. Only they can create top-level comments. Comments here also appear on the Quick Takes page and All Posts page.

There is a bicycle rack in my local park which hasn't been bolted down. It would take some work to steal the rack. Suppose that after factoring personal legal risk the effort to steal the rack equals $1,000.

Crypto prediction markets let you gamble on anything which is public knowledge. Whether the bicycle rack has been stolen is public knowledge. Suppose a "rack stolen" credit pays out $1 if the rack is stolen on a particular day and a "rack not stolen" credit pays out $1 if the rack was not stolen on a particular day.

Suppose that in the absence of prediction markets, the default probability of someone stealing the bicycle rack on any given day is 0.01. The "rack stolen" credit ought to be worth $0.01 and the "rack not stolen" credit ought to be worth $0.99.

If the total value of tradable credits is less than $1,000 then everything works fine. What happens if there is a lot of money at stake? If there are more than 1,010 "rack stolen" credits available at a price of $0.01 then you could buy all the "rack stolen" credits for $0.01 and then steal the rack yourself for $1,000.

What's funny about this is we're not dealing with a deliberate market for crime like an assassination market. Nobody has an intrinsic interest in the bicycle rack getting stolen. It's just a side effect of market forces.

4Sam Marks5y

This is pretty interesting: it implies that making a market on the rack theft increases the probability of the theft, and making more shares increases the probability more. One way to think about this is that the money the market-maker puts into creating the shares is subsidizing the theft. In a world with no market, a thief will only steal the rack if they value it at more than $1,000. But in a world with the market, a thief will only steal the rack if they value the rack + [the money they can make off of buying "rack stolen" shares] more than $1000. I still feel confused about something, though: this situation seems unnaturally asymmetric. That is, why does making more shares subsidize the theft outcome but not the non-theft outcome? An observation possibly related to this confusion: suppose you value the rack at a little below $1000, and you also know that you are the person who values the rack most highly (so if anyone is going to steal the rack, you will). Then you can make money either off of buying "rack stolen" and stealing the rack, or by buying "rack not stolen" and not stealing the rack. So it sort of seems like the market is subsidizing both your theft and non-theft of the rack, and which one wins out depends on exactly how much you value the rack and the market's belief about how much you value the rack (which determines the share prices).

3tjleing5y

I really like this framing of the market as a subsidization! To your confusion, both outcomes are indeed subsidized -- the observed asymmetry comes from the fact that the theft outcome is subsidized more than the non-theft outcome. This is due to the fact that the return on the "rack stolen" credit is a 100x profit whereas the "rack not stolen" credit is only a 1.01x profit. If instead the "not stolen" credit cost $0.01 with a similar credit supply you would expect to see people buying "not stolen" credits and then not just deciding not to steal the rack but instead proactively preventing it from being stolen by actually bolting it down, or hiring a security guard to watch it, etc. Different cost ratios and fluctuating supply could even lead to issues where one party is trying to steal the rack on the same day that another party is trying to defend it. Sidenote (very minor spoilers): this reminds me of a gamble in the classic manga Usogui, in which the main character bets that a plane will fly overhead in the next hour. He makes this bet having pre-arranged many flights at this time, and is thus very much expecting to win. However, his opponent, who has access to more resources and a large interest in not losing the bet, is able to prevent this from occurring. Don't underestimate your opponent, I guess.

Ahh, I had forgotten that "not stolen" shareholders can also take actions that make their desired outcome more likely. If you erroneously assume that only someone's desire to steal the rack -- and not their desire to defend the rack from theft -- can be affected by the market, then of course you'll find that the market asymmetrically incentivizes only rack-stealing behavior. Thanks for setting me straight on that!

lsusr's Shortform

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lsusr's Shortform

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