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Even Capped Prediction Markets Can Be Manipulated 130

Posted by samzenpus
from the man-behind-the-curtain dept.
Slashdot regular contributor Bennett Haselton writes "My last article on prediction markets contained an erroneous assumption, one whose implications are far-reaching enough that they deserve their own article. (And if you read to the end, I'm offering $100 to be split between the readers who submit the best alternative solution or the best counter-argument to the points made here.)" Read below for the rest of Bennett's thoughts.

In my last article, I wrote:

There could be rules and safeguards to prevent abuses of the system (rules that could be imposed by U.S. law, even if they're not enforced by overseas betting markets), such as not allowing individuals to bet more than $500. (This is already enforced by the Iowa Electronic Markets.) That's small enough to stop individual bettors from trying to manipulate the market through enormous wagers (although they might find ways to do that anyway). It's also small enough that it wouldn't be worth it for any one individual to try and influence a political outcome just to win a bet. You could try to enlist your friends to help you place a collective $10,000 bet on a single outcome, but the more people you rope into your coalition, the greater the chances of someone (a) turning you in for violating the betting laws, or (b) taking the $500 you lent them, and then refusing to pay it back if they win their portion of the wager.

There's an error here, but one subtle enough that even all the commenters (with no shortage of the usual snark) missed it. To begin with, consider what happens if two different betting markets are taking bets at different odds for the same event.

Suppose CappedEx, a futures exchange that limits each user to betting $500, is publishing 4:1 odds of an Obama victory. If you bet $40 that Obama will win and he wins, you get paid $10 (from other users on the exchange), but if he loses, you pay out $40. Meanwhile FreedomEx, an exchange that has no betting limit for any user, is publishing 6:1 odds for Obama winning. Bet $60 on Obama, and you get $10 if he wins, but pay $60 if he loses. On both markets, of course you can bet in the other direction as well.

What do you conclude from this? That the un-capped FreedomEx probably has more accurate odds, and that as James Surowiecki (author of The Wisdom of Crowds) said, betting limits "make [the markets] less accurate" and "real money is what makes it work"? Or that CappedEx, with its safeguards against manipulation, is more reliable, and FreedomEx is being manipulated by someone trying to change the reported odds of their favored candidate winning? Or that there is simply some random fluctuation in the odds as reported by various markets, so they'll naturally diverge at times?

The correct answer is: you should stop wasting time "concluding" things, and get online as soon as possible and make bets in both markets, because if they're allowing bets to be placed at different odds, you can guarantee yourself a profit.

Make a $50 bet in CappedEx on Obama to win (4:1 odds), and a $10 bet in FreedomEx on Romney to win (1:6 odds). If Obama wins, you win $12.50 in the CappedEx market and lose your $10 in FreedomEx, for a $2.50 profit. If Romney wins, you lose $50 in the CappedEx market but win $60 in FreedomEx, for a $10 profit. With a little algebra, you can show that any time the two markets allow you to place bets at different odds ratios, you can make a guaranteed profit by picking a ratio somewhere in the middle (in this case, the two ratios were 1:4 and 1:6, so we picked 1:5) and making separate bets in the two markets in opposite directions, for amounts in that ratio. (A commenter on the Marginal Revolution blog describes exactly how he made an almost risk-free profit through this kind of "pure arbitrage play". He said it was "almost" risk free because of other factors like currency conversion fluctuations.)

Now, any time a good is trading for a lower price in market A than it is in market B, and the costs of shifting the good between the two markets is negligible, traders will start to buy the good in market A and re-sell it for a profit in market B (the traditional definition of "arbitrage"). This increases demand in market A (driving the price up) and increases supply in market B (driving the price down) until the price difference disappears. In the same way, any time two prediction markets have different "market odds" for the same event, as arbitrage players lock in guaranteed profits by placing opposite bets in the two markets, the market odds in the two markets will converge toward each other until the gap is negligible. This is true even if one of the markets has a cap on what people can invest or how much they can stake on any particular outcome.

For Intrade, there couldn't be a worse time for someone to be pointing this out, but it seems logically inescapable: As long as there is a prediction market anywhere in the world that allows unlimited wagering on a particular outcome, all other prediction markets (whether they are capped or not) can be manipulated indirectly, by playing a large wager in the non-capped market. I was wrong to say that you would have to "enlist your friends" to place bets in the capped market, building a large coalition of market-manipulators (and hoping that none of them would rat you out for using them to circumvent wager-limiting rules). By placing a large wager in the non-capped market, and shifting the market odds there so that they're different from the odds in the capped market, you can indirectly "enlist" all the users in the capped market, to place arbitrage bets and make a guaranteed profit. When this happens, the odds in both the capped market and the non-capped market will shift, as the gap between them narrows -- which means you have manipulated the market odds in the capped market, without ever going near it yourself.

In this case, why have caps on the amounts wagered in prediction markets at all? (The Iowa Electronic Markets have a maximum investment balance of $500, and a 2008 paper, "The Promise of Prediction Markets, authored by several prominent economists, advocated the creation of prediction markets with a maximum investment of $2,000.) Presumably the cap is not to prevent unlucky investors from losing their life's savings, since the law already allows multiple ways to do that, by betting on volatile stocks in the stock market. And it won't stop market manipulation, if the capped market can still be manipulated by using another non-capped market as a proxy. Robin Hanson, Professor of Economics at George Mason University and one of the co-authors of the 2008 paper, candidly told me that the cap was just a matter of selling the idea: "As a practical matter, many people's comfort with such markets increases when there is a cap, so they are more likely to accept the proposal with a cap. So it makes one seem more reasonable to propose a cap, if one can get most of the benefits one wanted from such a system that has a cap, relative to one without it."

So is there a solution to the manipulation problem? Actually, is it even a problem? Robin Hansen and Ryan Oprea wrote another paper arguing that manipulators can improve prediction markets, by subsidizing the existing players in the markets and rewarding them for paying attention. (If a "manipulative" bet causes a sudden shift in the reported odds, opportunistic investors can place bets essentially wagering that the odds will return back to their previous level.) Economist Alex Tabarrok makes the same point here. This opportunism also means that the market shift caused by a manipulative bet usually corrects itself within a few minutes.

Presumably, if more people start to take prediction markets seriously, the incentives to manipulate them would increase. As Tabarrok adds, "prediction markets have truly arrived when people think they are worth manipulating". At the same time though, as more people start to take prediction markets seriously, presumably they'll attract more actual users, and since the amount of money required to shift the market is proportional to the amount already invested by everyone else, this means it will require larger amounts of money to shift the market odds to the same degree.

So these economists all seem to think that prediction market manipulation is a good thing, and that the prediction markets themselves are an even better good thing even when they can be manipulated, but now I'm not so sure. If people do think that market odds are worth manipulating, presumably the point is to create a self-fulfilling prophecy: People think that Romney's chances have gone up, so they become more incentivized to support him and vote for him, and soon his chances actually have gone up (although possibly not to the full extent of the boost in the manipulated market odds, so the manipulator may still lose money). If you can boost Romney's market odds even for a few minutes just by spending a few tens of thousands of dollars, how much would it cost to sustain the higher odds for several hours -- and what if those hours were at a crucial time in the election or in the news reporting cycle?

What if, contrary to my last assumption, people start to take prediction markets seriously enough to be influenced by them, but the prediction markets don't see a proportionate influx of actual investors and money -- so the cost of manipulating them remains about the same? IF prediction markets gain more influence in people's actual voting decisions, BUT those markets don't see an influx of new users, AND an election is close enough that the market odds could make a difference depending on when they're reported, AND someone spends enough to sustain the manipulated odds during crucial periods during the election... Well, that's a lot of assumptions you have to grant, but individually they're quite plausible -- and if all of them hold true, you could change the outcome of a presidential election for just a few million dollars spent on the prediction markets.

And in fact, if you successfully swung the election, you'd actually win all the wagers you had just placed -- which means that now rich manipulators can throw their election to their preferred candidate, and make a bundle. It also means that all those opportunists who usually act to "correct" the market odds deviations, by taking your free money when you start placing manipulative bets, could realize that your bets might actually change the outcome, and would decline to take your money -- which in turn means it would be even cheaper for manipulators to change the outcome, creating a self-reinforcing cycle. If smart bettors see that once a behemoth starts the market moving, the behemoth will probably win, they'll just get out of its way and clear an easier path.

The same kind of trick wouldn't normally work on the stock market -- if you're wealthy enough that you can increase the share price of a stock by buying enough of it to shift the market, then when you try to reap your profits by unloading the stock, the price will drift back down as you're selling it off. (Or if your purchases do manage to create a self-fulfilling prophecy -- your infusion of cash into the company enables them to realize their plans and become a genuine success -- well, then you're just a successful angel investor, more power to you.) But a presidential election prediction market would be analogous to a stock where if you can keep the price artificially inflated for several crucial hours on November 6th, 2012, then the price becomes permanently locked in at that point and you can sell it off for a profit, regardless of the value of the underlying company.

So, according to my own reasoning, this idea that I was so gung-ho about a few days ago, could not only be used to create a type of financial instrument that rewards manipulation more perversely than anything we've ever seen, but could also let a Saudi prince pick the next leader of the free world on a bet.

I'm not sure if there's a solution. I'm not a libertarian so I was never in favor of prediction markets as a matter of "personal liberty"; I was in favor of them because they're useful insofar as they can harness the wisdom of crowds to convey important information. But if they can be manipulated to influence real-world events, is it worth it?

In keeping with the theory that money does motivate people to think harder about such things, I'm once again offering $100 to be split between the readers who email me the best-argued solutions to this problem -- or the best counter-argument to any point I've made here. Put "prediction markets" in the subject line. If your submission wins a portion of the award, you can either claim the money for yourself, or to be donated to a preferred charity in your name. (I reserve the right to pay out less than the allotted $100 if there aren't enough worthy submissions, but that didn't happen last time.) Any sufficiently valuable comments are eligible even if they're not strictly counter-arguments or suggested alternatives, and I'll post a follow-up article summarizing what people send in. You can't make as much off of me, as you could have made by taking some market manipulator's intentionally losing bet on Intrade that Romney was going to win the election, but at least it's legal.

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Even Capped Prediction Markets Can Be Manipulated

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  • by SirGarlon (845873) on Monday December 03, 2012 @04:26PM (#42172583)

    I forget where I read this, but it still rings true. "When you sit down at the poker table, look around for the sucker. If you don't see one, it's you."

    Put in more concrete terms: the existence of exploits like this means there will be winners and losers. If you didn't find the exploit, you're not the winner. So why would I want to wager in a market that I can't guarantee is fair?

    • by CdBee (742846)
      If you have a pension plan you are already wagering in a market of unknown fairness.
      • by HornWumpus (783565) on Monday December 03, 2012 @04:36PM (#42172677)

        If you're in American SS you are already wagering in a market of known unfairness.

        • by Maxo-Texas (864189) on Monday December 03, 2012 @04:45PM (#42172751)

          If you are alive, in any country in the world, you are wagering in a market of unknown fairness.

          And it's probably unfair.

          • Re: (Score:2, Offtopic)

            When my kids were young, they would cry "That's Not Fair" with the best of them. That all ended, when I took them to the children's cancer ward at the hospital, and said ... "Life is not fair, anyone telling you that life should be fair is a liar and a thief. Don't trust anything they say, and watch your wallet".

            I have yet to have someone explain to me how "life is fair" economically, politically, or otherwise. ALL the fairness we have is how we treat each other. Outcomes are not certain, and that is not fa

            • To be fair: We were discussing markets. Not childhood diseases.

              With market systems you have some choices. You can vote with your feet. Game is rigged? Don't play that game. Fairness is relative.

              The average toddler is not allowed to vote with his feet and head up the street, though some try.

            • by AK Marc (707885)
              Giving one of your kids ice cream and the other none is not fair. Showing them terminal children will never make it fair. So teaching them that live is never fair, as if that's relevant to an ice cream issue is unfair.
        • by lucm (889690)

          American SS? Do they have cool uniforms like the German ones?

          • unfortunate that SchutzStaffel and Social Security have the same abbreviation, but it's only two letters, so collisions are bound to happen. Nevertheless, that is part of my sense of humor - to hear a phrase used in one context, and reply as if it was used in another context.

          • American SS? Do they have cool uniforms like the German ones?

            The K.I. SS [wikipedia.org] have flamboyant uniforms and face paint [wikipedia.org].

    • by booyoh (2511204)

      I forget where I read this, but it still rings true. "When you sit down at the poker table, look around for the sucker. If you don't see one, it's you."

      I know that it's a quote from the movie "Rounders".

      • by mcl630 (1839996)

        Rounders quoted Amarillo Slim, who quoted Warren Buffet, who quoted someone else, who quoted someone else...

    • When I sit at a poker table, and I see an sucker (not me), it is boring. Taking money from suckers is not my idea of fun, and poker is a stupid way to let a sucker depart from his cash. No, I'd much rather be the sucker at the poker table, because at least i can learn from the experience.

      That phrase is over played and nuanced in ways that most people over playing it don't really understand. When I sit at a table, and I don't see a sucker, I know I'm in good company, even if I am the sucker.

    • by chrismcb (983081)

      So why would I want to wager in a market that I can't guarantee is fair?

      Because if you know how to exploit it, you can make gobs and gobs of money. Just because a market isn't fair, doesn't mean YOU can't earn money.

  • by Anonymous Coward

    Not reading articles is my God-given right as Slashdot reader - it's been a tradition for generations! Not even for $100 will I remotely try to figure out what your article is about before commenting, no sir.

  • by M0j0_j0j0 (1250800) on Monday December 03, 2012 @04:31PM (#42172631)

    Money is power, to rule, to have, and to change the future.

    But back to the piece i can give you an example of a system protecting itself with a cap. If you go to a Casino, you cannot use Martingale, the roulette caps you to protect the house.

  • by HornWumpus (783565) on Monday December 03, 2012 @04:31PM (#42172637)

    Ether the market is large, possibly a decent predictor and more or less manipulation proof due to volume or it's small, a crappy predictor and easy to manipulate. Thinking there are enough people who just want to vote 'for the winner' and will look to a betting line for their vote is just stupid. They will vote the same as their peer group.

    Also note: everything said in this manifesto also applies to futures markets. See the Hunts and Silver (or Trading Places and FCOJ) to see what real markets do to big money that thinks it's big enough to move markets for profit.

    See also penny stocks to see what relatively big money does to thinly traded stocks. But nobody places any value on the 'predictions' implicit in penny stock prices.

    This dude is onto a 'solution' in search of a problem.

    • by Bieeanda (961632)

      This dude is onto a 'solution' in search of a problem.

      This is a common trait in Haselton's screeds. I am continually baffled as to why they keep giving him a soapbox to flaunt his ignorance.

  • by Anonymous Coward

    In America, we don't make bets. We make investments.

  • by gmuslera (3436) on Monday December 03, 2012 @04:38PM (#42172689) Homepage Journal
    Is risky to predict something that you can affect if you know the result of that prediction. Specially if there are more players with the same tools.
  • by scheme (19778) on Monday December 03, 2012 @04:41PM (#42172707)

    The same kind of trick wouldn't normally work on the stock market -- if you're wealthy enough that you can increase the share price of a stock by buying enough of it to shift the market, then when you try to reap your profits by unloading the stock, the price will drift back down as you're selling it off. (Or if your purchases do manage to create a self-fulfilling prophecy -- your infusion of cash into the company enables them to realize their plans and become a genuine success -- well, then you're just a successful angel investor, more power to you.)

    You have a misunderstanding of how the stock market works. Namely, if you buy company X's stock, company X will probably not get any actual money from the purchase. You're almost certainly purchasing the stock from another investor so you wouldn't be an angel investor. A company can take advantage of a rise in it's stock price by selling it's own stock or by using stock to purchase another company or something like that but that is a side effect of someone pushing up stock prices.

    If the author doesn't understand a simple thing like that about financial markets, then I don't have much faith in his ability to talk cogently about markets in general.

    • by Ichijo (607641)

      [I]f you buy company X's stock, company X will probably not get any actual money from the purchase.

      No, but you will raise the value of the company, which has the same effect.

      • by scheme (19778)

        [I]f you buy company X's stock, company X will probably not get any actual money from the purchase.

        No, but you will raise the value of the company, which has the same effect.

        Not quite, the market valuation of the company increases but that doesn't translate into money that the company can use. The company would have to either sell stock into the open market or use it as collateral or something similar in order to get money. It's just as if you owned a home and the value of the home increased after you bought it. The increase in value doesn't do much for you unless you do other stuff (refinance, get a home equity loan, etc.) to take advantage of the that increase.

    • It appears to me that he is presenting two scenarios: 1. You are not an angel investor and what you do doesn't net you money or, 2. your a successful angel investor but your scheme only works because investing works.

      I don't think he misunderstands financial markets at all. This looks like a reading comprehension fail to me.

      • by scheme (19778)

        It appears to me that he is presenting two scenarios: 1. You are not an angel investor and what you do doesn't net you money or, 2. your a successful angel investor but your scheme only works because investing works.

        I don't think he misunderstands financial markets at all. This looks like a reading comprehension fail to me.

        A few things. Angel investors usually get involved in a company at it's initial stages and don't buy the company's stock in the open market. But let's ignore that and consider the scenarios. Suppose you bought a bunch of Intel stock on an exchange somewhere and you bought enough that Intel stock went up an appreciable amount. You almost certainly bought the stock from other investors or a market maker so Intel didn't get any money from your stock purchases. Intel's market valuation went up but that won

        • Most companies work on loans. Very few companies have enough money that they can spend it on the day to day running of the business. When banks give loans to companies, one of the things they look at is the value of the company. If you push the value of a company up to the level where a bank will give them the loan they need, it will help them out. Not in the direct sense that you are implying, but the author is talking about people dumping huge amounts of money into a stock, so the regular understanding of

        • by jedwidz (1399015)

          Likewise, stock prices don't directly help companies, contrary to what the submitter says.

          I previously brainstormed some counterexamples here [slashdot.org], of reasons why companies are affected by their own share price.

          Another thing to add is that a company's share price can affect its inclusion or placement in stock indexes (e.g. S&P 500), which I'm sure would have some effect on brand value (it's free advertising). A low share price or market cap can even get you booted off the exchange.

    • by ceoyoyo (59147)

      If you raise the price of a certain company's stock by a significant amount through manipulation, that company can and probably should sell more stock, so they will get money. Essentially, you're offering the company money. You're right, they do have the option of declining, but they may very well accept.

  • by Jiro (131519)

    Presumably the cap is not to prevent unlucky investors from losing their life's savings, since the law already allows multiple ways to do that, by betting on volatile stocks in the stock market.

    Oh, please. Presumably, Bennett is just not thinking things through, and the cap is to prevent unlucky investors from losing their life's savings.

    It was probably before a lot of people here were around, but in 1999 Slashdot ran a story about someone who couldn't participate [slashdot.org] in Red Hat's IPO because he didn't have en

    • by ceoyoyo (59147)

      Caps on betting are almost always to prevent addicts or the stupid from losing more than they can afford. That's why slot machines still take the time to spin the pretty (digital) dials. They'd be much more efficient (in terms of taking your money faster) if you just pushed the button and they told you whether you won or lost. Predictions markets are pure betting. They're NOT like the stock market. Stock markets have a positive expected value: on average, they go up because things of value are being pr

      • by AK Marc (707885)

        Caps on betting are almost always to prevent addicts or the stupid from losing more than they can afford. That's why slot machines still take the time to spin the pretty (digital) dials. They'd be much more efficient (in terms of taking your money faster) if you just pushed the button and they told you whether you won or lost.

        No, they'd be much less efficient. People would get bored and move on. They are entertainment. Go watch them sometime. When the spin gets slow enough, they'll spin past some big jackpot-winning combos, and often stops with a "win" being a single click away. They are regulated for how much they must pay out, so they don't tamper with the winning ratio, but they do tamper with the near misses and such to prey on the addicts. The spin isn't to "benefit" the addict, but to directly "harm" them by triggeri

        • by ceoyoyo (59147)

          Delfabbro, Paul; Falzon, Katya and Ingram, Tania. The Effects of Parameter Variations in Electronic Gambling Simulations: Results of a Laboratory-based Pilot Investigation. Gambling Research: Journal of the National Association for Gambling Studies (Australia), Vol. 17, No. 1, May 2005: 7-25.

          "[subjects preferred] a faster rather than a slower play speed"

          • by AK Marc (707885)
            Irrelevant without context. Were the choices "instantaneous, 5s, 15s, 30s and 60s"? And player "preferences" from a self-reported preference is not related to what I said. Players may "prefer" to have clocks visible so they can gauge time better, but the casinos know that lack of timekeepers leads to longer play times and more profits, by providing the opposite of the player's "preference."

            And a cite that's not available for viewing is not much use. I searched on that article and could only find refere
            • by ceoyoyo (59147)

              I said slot machines that ran faster would be more efficient at taking your money. You said no, because people prefer to play slots that are slower. I cited a scientific paper where they actually tried the experiment and found that people preferred faster slots. Your speculation is not a valid rebuttal.

              • by AK Marc (707885)
                I can only speculate because the cited paper is not available for review. A single line taken out of context from a paper is not worth much, especially when it looks to be a catch-sentence cited many places. Until I read the paper, I can't even verify the quote is correct. Have you actually seen the paper, or did you re-quote from one of the hundreds of quotes of that sentence I found when trying to find the paper itself?

                The fact that I ask what the parameters were for the test and you dodge the questio
  • by clong83 (1468431) on Monday December 03, 2012 @04:54PM (#42172847)
    Not disputing that two sites might have different odds. Just curious as to why it would be considered a problem? The disparaity should be self-correcting in at least the folloiwing two ways:

    1) Savvy bettors will help even it out. If the odds are different, as you point out, a risk-free gain can be made by clever wagering. With free money on the table, people will write automated scripts to detect this sort of thing. They will bet as much as they can when this scenario happens, because hey, why not? This will in effect bring the odds closer together.

    2) Typical bettors will help even it out. Suppose you think Obama is going to win. You're pretty sure of it. You check the two sites, and and see odds of 4:1 and 6:1, respectively. Why on EARTH would you place a bet on the 6:1 site? If you only have $100 to bet, it will go further on the 4:1 market. When this situation occurs, the average Obama bettors will flock to the 4:1 site, while the Romney bettors will go to the 6:1 site. The odds will converge.

    If, in a scenario where someone has money to burn and continually manipulates the market, then these markets lose their predictive value, yes. However, in that case, there is easy money to be had... Might as well stop complaining and ride that train.
    • by spitzak (4019)

      You did not understand what he is arguing. He is saying, exactly like you are, that the disparity would self-correct and make the two markets have equal odds.

      The problem he is arguing is that if one of those markets is not doing something to prevent manipulation, then because of the self-correction that manipulation will actually spread to all markets. including ones trying to prevent it with things like caps.

      • by clong83 (1468431)
        I see. Well, in that case, he might be right, but I still doubt it... He posits then that the effect of the market manipulator will dilute across all markets. Okay, but so what?

        I would argue that a heavily skewed market would then attract heavier volume, which will dilute the manipulators influence until we reach an equilibrium. Going with the same example, lets assume the two markets have closed the gap, and finally reach the same odds, say 5:1. That doesn't mean that equilibrium has been reached.
        • by dala1 (1842368)

          In most markets, eventually you have to conform to reality. As an example, bid up the price of real estate about certain market fundamentals and you have a bubble that will eventually burst. In this case, reality may conform to the market, with bizarre consequences. It's actually a very interesting economic problem.

          • by clong83 (1468431)
            I find the notion that reality conforming to a semi-obscure prediction market based in Ireland to be patently ridiculous. Something like an election is decided based on millions of individuals who go out and vote. An example from the most recent election in the US:

            Every statitician worth their salt was predicting Obama as the likely victor. Nate Silver was only one, but he had the biggest microphone. There was also Andy Tannenbaum (electoral-vote.com), Larry Sabato (UVA center for politics), and even
  • Huh? (Score:5, Interesting)

    by mcmonkey (96054) on Monday December 03, 2012 @05:03PM (#42172923) Homepage

    I'll start by admitting there's a lot of that I didn't understand. I think that's because a lot of it is gibberish.

    There are some strange ideas as to what constitutes "manipulation". If I go to a store and purchase an item, I've decreased the inventory of that item at that store. That's not manipulation, that's using the market as designed. If I make a bet and the odds adjust to encourage betting against me, that's not manipulation. That's the way the system is designed. Unless the game is fixed, the house doesn't care who wins. The odds are calculated to encourage equality in wagers, so the losers pay the winners and the house takes the vig, no matter what the outcome. Changing odds isn't manipulation.

    To think a prediction market would influence the outcome of a presidential election--what, because no money depends on election results now? You've been reading too many comic books or seen too many Bond films if you're worried about a US election being affected by a villain looking to win a bet. How about a villain looking to win a defense contract, get foreign aid, get a military base relocated to/from his country?

    You don't have issue with a Saudi prince picking the next president of the US, but do have issue if the pick is to win a bet in a prediction market? How is that any better or worse than a Saudi prince picking picking the next president of the US to keep arm sales to the Middle East flowing, or keep aid going to Israel?

    I think the above ramblings fit in to the "navel gazing" category. That you wrote about two markets with different prices for the same wager/good and didn't immediately address the opportunity for arbitrage makes me think the odds for an insightful conclusion are low.

  • Presupposition (Score:5, Insightful)

    by Chuckstar (799005) on Monday December 03, 2012 @05:07PM (#42172973)

    This analysis presupposes that movement in the prediction markets will cause movement in the actual election. This is not obviously true, to this humble observer. Frankly, the most recent election tends to contradict that entire line of reasoning. The overwhelming media analysis matched what was on the prediction markets (very close election with maybe Obama slightly favored). Meanwhile, it really wasn't close at all, at the end of the day.

    In my opinion, it's a little silly to believe that billions in advertising, direct mail, social media, etc. was unable to close the gap, but manipulation of the Intrade trading range could swing the whole thing. (I'm not trying to claim those billions had no effect. I'm only claiming that with all the noise in the election, the signal from any manipulation of the prediction markets would likely be swamped.)

    • by ceoyoyo (59147)

      "I'm not trying to claim those billions had no effect"

      Stats suggest that is indeed the case. I think it was in Freakonomics, but there was a study that showed, beyond a certain base investment required to get yourself known to the electorate, investing more didn't really help a candidate.

      • by greg1104 (461138)

        A presidential election with an electoral setup is not a typical market though, and major drift between the popular and electoral votes would present a PR problem. And any study that claims money can't be turned into popular votes just wasn't thinking hard enough about how to spend the money. A major reason that Obama won the election by such a large amount was better directed spending, from having done this before. You do have to spend the money correctly though, such as using a heavily open-source platf [arstechnica.com]

        • by ceoyoyo (59147)

          You're suggesting that an actual study, looking at many elections, actual spending, and the success rate of the candidates, is wrong because Obama used open source?

          • by greg1104 (461138)

            I'm suggesting that technology has enabled spending in previously infeasible areas, and it's possible that really does work. The Obama campaign has been seeing a measurable return on investment on things like personalized e-mail to voters, to the point where they tested trial messages to tweak their presentation before the mass mailings.

            I distrust extrapolation from old data here. It wasn't possible to develop a platform for this sort of software in the amount of time between presidential campaigns before

  • Okay, you're talking about arbitrage betting and they're seriously hard to find online -- the sites that provide betting are almost in lock step and I've looked into writing ruby code that scrapes this and computes when there's an arbitrage. No luck.

    The second major confusion is that you think that a capped market would be forced to make a bet available:

    Suppose CappedEx, a futures exchange that limits each user to betting $500, is publishing 4:1 odds of an Obama victory. If you bet $40 that Obama will win and he wins, you get paid $10 (from other users on the exchange), but if he loses, you pay out $40. Meanwhile FreedomEx, an exchange that has no betting limit for any user, is publishing 6:1 odds for Obama winning. Bet $60 on Obama, and you get $10 if he wins, but pay $60 if he loses. On both markets, of course you can bet in the other direction as well.

    The answer to this is simple: CappedEx would not offer the bet that creates an arbitrage against FreedomEx.

    Let me explain this to you in sports.

    • by vlm (69642)

      Most of the futures exchanges I've played on follow a financial model rather than a sport betting model. There is no house, well, not directly.
      "This contract pays $1 if Rmoney wins" I'm willing to write/sell up to 100 copies at 0.40 each... if you have a standing order to buy 100 @ .40 then we have a transaction, plus or minus some commissions, etc. If not I sit in the order book until someone enters a buy at 0.40..

      Your 20 to 1 odds, if I understand sports betting correctly, would be something ridiculous

  • Systems don't generally exist in locally-unstable equilbria, because if perturbations generate their own positive feedback and if the system isn't carefully protected from even the slightest perturbation, then it will have already left the unstable equilibrium.

    So, although it sounds cynically wise to claim that "people want to vote for whoever they think will win the vote", any such effect must not be very strong. The first partisan victory would have tilted the scales toward a partisan landslide which would have set up a partisan shut-out, and we'd shortly be laughing about "second-party voters who throw their votes away" the way we talk about "third-party voters" (where plurality counting really *does* create such positive feedback) today.

  • Time for the old line that any "real" investor knows, "The market can remain insane longer than you can remain solvent". In both the short term and for any individual contract it would be a miracle if this was the first market in the history of humanity that couldn't be gamed or scammed in the short term. In the long term I think it would even out.

    One solution is publicity. I see no reason the record of the market cannot be held open or psuedo-open. It shouldn't be very hard to detect even a distributed

  • I think a lot of the confusion comes from calling this a "market". In a market you place "bets" on pork bellies, the S&P 500, the future value of the yen, whatever. Placing bets on the outcome of an indeterminate event (as opposed to the future price of an asset) is simple gambling, pure and simple.

    I have no problem with gambling, but stop trying to pretend it's something different by calling it a "prediction market." You aren't buying or selling anything, you are gambling. Call a spade a spade.

    • by khallow (566160)

      I think a lot of the confusion comes from calling this a "market".

      Given that it is a market, there is no confusion.

      In a market you place "bets" on pork bellies, the S&P 500, the future value of the yen, whatever. Placing bets on the outcome of an indeterminate event (as opposed to the future price of an asset) is simple gambling, pure and simple.

      There's no distinction between placing bets on the future price of a generic securitized asset and the future price of a particular sort of asset which happens to be valued based solely on which candidate wins the US Presidency in 2012.

      I have no problem with gambling, but stop trying to pretend it's something different by calling it a "prediction market."

      It's a market which trades in predictions. No pretense.

      I find it bizarre that one can claim that a market on pork bellies futures and a betting market on the US Presidency are somehow very different. You just aren't understa

  • If people do think that market odds are worth manipulating, presumably the point is to create a self-fulfilling prophecy:

    this is not solely a financial market phenomena. supposedly womens skirt lengths predict some economic BS or ground hogs seeing shadows means something. You've always had people trying to push microskirts and shoot groundhogs (presumably not both at the same time). I would hazard a guess that irrational beliefs will always lead to irrational results, in all three cases. So why worry about regulating a futures market, when it would be no less stupid to create a national dress code for womens skirts and s

    • So why worry about regulating a futures market, when it would be no less stupid to create a national dress code for womens skirts and shade umbrellas for groundhogs?

      Governments do have a dress code. It's called an indecent exposure law. And it's why every baby is born a criminal.

  • by Anonymous Coward

    ... an almost risk-free profit through this kind of "pure arbitrage play".

    Arbitrage has been a problem since the price of transport became a minor expense in selling goods. It is caused by a difference in supply-demand not by capping the investment in markets. If the price in market A is different to market B, a profit can be made if both have investment caps, if neither has investment caps, or if only one has an investment cap.

    The main purpose of the stock market itself is arbitrage. Not via a different market but by putting a premium on the time-value of money. If a shareho

  • Maybe if you provided even the slightest bit of evidence for the huge premise that odds offered by betting markets will change voting behavior in a predictable manner it might matter.

  • Many of tne objections to such markets could be solved not with a maximum cap, but with a minimum of say $100,000 or $1 million. The proper use of such markets is as a hedge. If a chain of grocery stores, for example, thinks that an Obama win will make them lose $3 million, they can reduce or eliminate the risk by putting $1 or $1.5 million on Obama. (If he wins the election, his policies cost them $3 million, but the trade makes them $1.5, so they only lose $1.5 net.) At $1 million minimum, Bubba Gambler
    • by neyla (2455118)

      It's seldom worth it to hedge against 1:2 odds. Hedging is fundamentally a sort of insurance, and since there's costs involved you only want to insure against risks you can't afford to carry yourself.

      If there's a 1:10000 chance that you $1M house will be completely destroyed in a year, the expected loss is $100/year. Yet it's still worth it to purchase $300 insurance - because few can afford to shoulder the potential $1M loss.

      If, on the other hand, there's a 75% chance that Obama will win, and you believe i

  • I follow it all and it makes sense. Except for the influence it has on the outcome of the bet. I am sure there is some measurable influence on the outcome of an election, but I'm not sold on it being able to sway an election to the point of being a good use of marketing dollars. Do we have any research in this field?

  • In his example the bettor trying to make money has to put 5x as large of a bet on the capped market than he puts on the uncapped market, thus making the limit far smaller on the uncapped market. Couldn't this make the arbitrage betting so inefficient, or even impossible (if the smaller amount falls below the minimum unit you can bet) that in fact the markets can remain with different odds?

  • "The same kind of trick wouldn't normally work on the stock market -- if you're wealthy enough that you can increase the share price of a stock by buying enough of it to shift the market, then when you try to reap your profits by unloading the stock, the price will drift back down as you're selling it off."

    -

    This is incorrect. An investor could buy up the stock and take a profit by investing in options that expire at the value peak.

  • The problem is not a problem in the sense you are thinking of it. If you have a small market and a large one, then the small market is going to have network effect problems (similar to Metcalfe's Law). It can still provide value if something about the smaller market (the traders or the sort of claims covered) is different enough. The Iowa Election Market (IEM) has an interesting trading group with a bunch of US and academic traders (and US traders no longer can trade on Intrade at present). It also has some
  • This is just another dude who thinks we want to read his diary.

  • > The correct answer is: you should stop wasting time "concluding" things, and get online as soon as possible and make bets in both markets, because if they're allowing bets to be placed at different odds, you can guarantee yourself a profit ..

    I don't think so, the only people who will win are the house. All's happening here, is the clients money gets moved round the table ...

  • In the UK we have had uncapped order-matching betting on virtually anything for over a decade. There has been a steady flow of attempts to profit from insider information (the identity of the new Archbishop of Canterbury is the most recent!) and manipulate events (darts and snooker seem to be frequent offenders). There were even attempts to cut power to the floodlights at Premiership evening games if they were heading for an unprofitable result. However the betting exchanges are perfectly willing to suspend
  • This only works in one flavor of the universe where people vote based on prediction markets.
    Only Romney diehards would do so, therefore the point is moot.

    In the future this might work in a MMORG populated by ADHD maniacs. They have drunk the kool-aid and trapped themselves in a parallel crazy universe where there is no difference between voting for mayor of Tunesville and mousing over a +1 button. Real world, people think between stepping away from computer and driving to the polls.

    I have a feeling the worl

  • You need not predict markets.
    Hire a Congress man as your proxy.
    http://www.cnbc.com/id/43471561 [cnbc.com]

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