Limits of Current US Prediction Markets (PredictIt Case Study)

The more salient counter-argument, I think, is that if prediction markets are functioning as advertised then this shouldn't matter.

If lots of Trump supporters are attracted by advertising to make expressive bets, this should draw smart money like blood draws sharks as informed investors snap up the free money...but this is contingent on smart investors actually being able to profit from this mispricing, which for the reasons in the post they may not be.

Limits of Current US Prediction Markets (PredictIt Case Study)

OP here: it is quite plausible that I am wrong, I am not a tax expert at all.  I'm surprised to hear that gambling income is a flat 25% rate - I've always heard about lottery winners losing ~half their money to taxes.  Quick Googling suggests that 25% might be the withholding rate rather than the tax rate: so if you make $1000 on gambling $250 will be withheld, but then you might actually owe more/less depending on your income the next time you do your taxes.  That is a guess based on a few minutes cursory Googling though, I do not entirely trust it.  If anyone can give a credible answer to this question I can update the article.

Limits of Current US Prediction Markets (PredictIt Case Study)

Adding some further comments on the performance of prediction markets in the 2020 election here - while the election is still ongoing, I think so far it seems to support the article.  Some numbers here are based on my fallible and sleep-deprived human memory, if anyone disagrees/has a better source I can update this.

Coming into the election, 538 had Trump at a 10% chance to win (saying words to the effect of 'Biden is in a very strong position, where he has several paths to victory even through a correlated polling error of the sort that happened to Clinton').  PredictIt and Betfair had Trump at 30-40%.

As the day went on, Trump did better than expected in several places (particularly Florida), and took a lead in several important states (PE, MI, WI), though with many mail-in and urban ballots remaining that were expected to be Democrat-favored.  At 11pm, 538 wasn't giving hard numbers but a couple places in their chat were talking about Trump being anywhere from a 20-50% chance to win and emphasizing that mail-in ballots were expected to shrink or remove his leads, while PredictIt and Betfair both had Trump at ~70% to win.

As of this writing on the afternoon of the next day, with no new surprises I am aware of except for the entirely as-predicted shrinking of Trump leads due to later-arriving ballots, 538 continues to say 'Trump is behind but could still manage an upset', while Betfair and PredictIt have swung from their previous ~70% to a ~20% that is in line with what 538 was saying last night.

While there are several interpretations you could place on these numbers, it rather looks to me like prediction markets overrated Trump from the beginning, heavily overreacted to Trump's early outperformance, failed to predict the effect of late-arriving ballots until it actually happened, and then swung around and dropped their probabilities heavily based on this predictable news, while 538 did a lot better.  

538 forecast: 10% -> Trump gets positive news -> 20-50% -> predictable shrinkage in Trump lead -> ~20%
Prediction market forecast: ~40% -> Trump gets positive news -> ~70% -> predictable shrinkage in Trump lead -> ~20%

If we were dealing with an efficient market I wouldn't expect this to happen.  Then again, if we were dealing with an efficient market I would expect hedge funds to hire skilled analysts on 6-figure salaries to stay up all night tracking election results and arbitraging market swings like that.  Until that happens, I will keep an eye on prediction markets, but I will trust 538 over them.

Limits of Current US Prediction Markets (PredictIt Case Study)

Two replies here, I think:

First, are any of the things you suggest in fact legal for US-based bettors?

Second, how difficult in terms of time/inconvenience/up-front capital costs without the potential for leverage are they compared to the ways in which you can bet on e.g. the price of Google stock?

If you're telling someone in the US "you should be willing to bet your views on prediction markets, if you're right it's free money" when what you mean is "it's free money provided you're willing to dedicate hours to working your money through crypto exchanges, committing tax fraud along the way", that feels somewhat different.

I would be willing to tell someone who thinks Google shares are underpriced "go buy some then," because buying Google stock at low cost is legal, very easy, and even if you have limited up-front cash the real financial markets offer opportunities for leverage (options etc.)

I would not be willing to tell someone who thinks Trump Wins shares are underpriced "go buy some then" when that process is time-consuming, difficult, and likely illegal.

Limits of Current US Prediction Markets (PredictIt Case Study)

Sure, happy to change it. Does 'Limits of current US Prediction Markets' plus some commentary at the top to the effect of 'this is based on a case study of PredictIt, per some comments if you are outside the US you may have better options' sound reasonable?

Limits of Current US Prediction Markets (PredictIt Case Study)

Ah, someone with the time and energy to proofread and LaTeX things for me! No objection, thank you very much! (I actually didn't know other people were able to edit my posts though, how does that work?)

Limits of Current US Prediction Markets (PredictIt Case Study)

Fair enough, that part is worded more strongly than I can really justify. I'd definitely still say it's quite possible that they are correct, and I still wouldn't think you can easily show them to be wrong by EMH-style reasoning.

Limits of Current US Prediction Markets (PredictIt Case Study)

It's possible! I'm writing this from a very US-based perspective, where the main prediction markets I hear talked about are PredictIt and IEM (and I think IEM might be even worse for betting at scale?) If you have access to a prediction market where these problems are smaller/nonexistent, it will be more accurate. And 2% charge of profits is much lower, plus looking quickly at the Betfair website it seems to have a pretty good amount of liquidity at a reasonably small spread.

I'm not sure how accessible Betfair is to someone from the US from a legal/tax standpoint, so the overall point may still stand if you're talking to someone in the US/if you think that a lot of the people informed on a given issue are in the US.

(And do you really have zero taxes on gambling profits? I would not have guessed that).

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