SimonM

One common theme that I come across quite a bit in the prediction market space is: > Prediction markets would solve [x][1] And the proposal for "solving" [x] is: 1. Set up a prediction market 2. ??? 3. Profit These people need to consider the idea that "prediction markets aren't as popular as you think because they aren't as good as you think". (And I say this as a person who is a big fan of prediction markets!) If you think prediction markets are valuable, it's likely because you think they price things well - probably due to some kind of market efficiency... well why hasn't that efficiency led to the creation of prediction markets... > Where are all the prediction markets? Maybe if prediction markets aren't popular for your specific use-case, it's because prediction markets are less efficient. The cost to markets of acquiring information is high Prediction markets are very good at enabling diverse participants to ensemble their forecasts in sensible ways. However, they are not very good at compensating participants[2]. Simple example - all information from the same source For example, consider a market on a coin flip, with some unknown probability p of heads. The market will resolve based on the outcome of a single coin flip. However, the coin is available for anyone else to come over and test, but there's a catch. You have to pay to flip the coin. How many times would you flip the coin? To make this simplified model even simpler, let's assume that participants will always take as much profit from the market as possible (eg they are risk neutral or the size of the market is small relative to their bank-roll). Under these assumptions, after each flip, the participants will move the market price to their new posterior. Well, after n flips, the market price is going to be ∼μn=1n∑ni=11ith flip is success (this will depend on the initial prior; we can do all these calculations explicitly with a beta distribution, but it doesn't alter the result). How m