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Even Capped Prediction Markets Can Be Manipulated

samzenpus posted about a year and a half ago | from the man-behind-the-curtain dept.

The Internet 130

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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my eyes glazed over after the third paragraph (-1, Troll)

Anonymous Coward | about a year and a half ago | (#42172521)

what the hell? couldn't this had been posted as a link to a page full of text with the slashdot submission being the TL;DR version?

Re:my eyes glazed over after the third paragraph (0)

Anonymous Coward | about a year and a half ago | (#42172595)

I can earn $100 in the time it would take me to read and parse this, and then cogitate for a potential payout that probably would never come.

Re:my eyes glazed over after the third paragraph (4, Insightful)

codewarren (927270) | about a year and a half ago | (#42173105)

And you could have earned even more than that in the time it took you to learn all the stuff that allows you to make $100 in that amount of time.

I could have made thousands of dollars digging ditches in the time it took me to learn everything that I needed to know in order to make $100/hr, but that wouldn't have made it worth while in the long run.

I also could have made thousands of dollars in the time it took me to read some philosophy books that never netted me any money directly, but that wouldn't have made it worth it either.

Sometimes it is just worth it to learn a new concept or think in a way you hadn't thought before.

I hear this a lot from shoddy engineers (my field, but equally true in other fields) who can't be bothered to learn anything new unless it's on the company's dime because their time is somehow worth too much to take the time to learn more.

This pervasive attitude that only what makes you the most money in the here-and-now is all that's worth doing is a real problem.

Re:my eyes glazed over after the third paragraph (0)

Anonymous Coward | about a year and a half ago | (#42173229)

I believe the OP is referring to the $100 "prize" offered by the author. Unless the author is offering the same prize for figuring out the same problem many, many times I would conclude that the time spent (or in this case wasted) determining how to implement a better way of doing things is not time well spent.

Re:my eyes glazed over after the third paragraph (1)

mcrbids (148650) | about a year and a half ago | (#42173803)

In a literal sense, taking time to learn new stuff is only worthwhile when the new stuff you learned is at least more valuable than what you already know.

Knowing mechanical skills is valuable. But I'm a software engineer, and I get paid significantly more than I pay my mechanic. So, learning how to fix cars would be antiproductive two-fold; I would not only waste time learning something less valuable than what I already know how to do, I would also spend time learning to do this that I could be spending to earn money.

Engineers as well as skilled workers of many different fields face this exact dilemma. It's not so much a problem as it is reality.

That said, I take the time to learn stuff (including mechanical skills) anyway because I invariably come away from it with a point of view that I didn't previously understand and that makes me more valuable in all terms, near and far, and I simply enjoy understanding stuff, from piloting a plane to rebuilding an engine to understanding canvas manipulation algorithms in javascript.

Re:my eyes glazed over after the third paragraph (1)

codewarren (927270) | about a year and a half ago | (#42174125)

So, learning how to fix cars would be antiproductive

You are correct and a lot of people miss this fact, thinking they are saving themselves money by doing their own mechanic work, but this was not the point I was making.

Learning new concepts, such as the intracacies of how economies work prove to be extremely useful in cases well beyond economics. This is not peculiar to economics either but is true of all things where you must learn to think in a new and abstract way.

I know a lot about how quantum mechanic works. I'll never put this knowledge to direct work. But the concepts learned have proved useful anyway. I will never be an evolutionary biologist either, but understanding concepts which allow irreducibly complex things are built by evolution have proved to be useful conceptual tools.

This was the point I was trying to make. There's an indirect benefit to understanding new concepts.

Re:my eyes glazed over after the third paragraph (1)

HornWumpus (783565) | about a year and a half ago | (#42174417)

What about knowing enough about fixing cars not to get sold a 3K$ muffler bearing job?

Don't even start on what a new set of piston return springs cost, much less installation. Many amateur mechanics can't even find them.

Note: if you wrench your own car you can fix it better. OEMs (all of them) make all sorts of compromises you never would. Also it's fun to make horsepower and get it to hookup.

If you didn't learn to wrench while you were young, you never will. Bet you got a new car on your 16th.

Re:my eyes glazed over after the third paragraph (1)

AK Marc (707885) | about a year and a half ago | (#42175013)

What about knowing enough about fixing cars not to get sold a 3K$ muffler bearing job?

What, you mean my $4.5k muffler bearing job was overpriced?

Don't even start on what a new set of piston return springs cost, much less installation. Many amateur mechanics can't even find them.

Having fixed them on my mom's car, the piston return springs (called "valves" on an interference engine after the cam belt breaks) were found, and were broken (well, bent).

The best thing about turning your own wrench is not knowing how to fix it, but knowing what problems are terminal, and which are just annoying. Limping home in a "sick" car knowing that you'll not be doing additional damage is much better than worrying that the sound signals an impending complete failure. Like squeaky or thumpy brakes. Will you lose brakes completely soon, or can you make it to your scheduled repair appointment?

Re:my eyes glazed over after the third paragraph (0)

Anonymous Coward | about a year and a half ago | (#42175501)

That said, I take the time to learn stuff (including mechanical skills) anyway because I invariably come away from it with a point of view that I didn't previously understand and that makes me more valuable in all terms

So despite what you said in the first half of the post, this last bit seems to be more agreeing with the original poster than the rest of your post. Said type that was being complained about either are not taking into account the possibility of them enjoying to learn more, or actually don't enjoy learning about things. And for many jobs and positions, the latter puts them at a big disadvantage toward other people who do enjoying learning stuff, ranging from definite problems with engineers stuck in their ways because they don't keep up to date on as much stuff related to their work, to more of a gamble with learning stuff outside their field that might be useful depending on what they end up doing.

Re:my eyes glazed over after the third paragraph (0)

Anonymous Coward | about a year and a half ago | (#42172781)

I have completely stopped reading any of Bennett's useless slashdot dissertations.

Re:my eyes glazed over after the third paragraph (-1)

gl4ss (559668) | about a year and a half ago | (#42173191)

what the hell? couldn't this had been posted as a link to a page full of text with the slashdot submission being the TL;DR version?

beats me. is this some kind of drivel about some idea some guy had about how to make so called arbitrage proof betting markets or what the fuck? why would you want that? or is this some scam selling a program for doing it? because achieving it is always a game itself, it ends up being extremely hard and the betting houses would change their odds accordingly OR even bet against the other betting traders on their systems if they really believe that they have called the event better.

and if you can find such bets, why wouldn't you take them and whats so bad about them?

why the fuck is this here? what the fuck is this about manipulation? was this guys idea a global socialistic everybody gets to vote the same amount of money on everything communist mega plan? of course betting can always be "manipulated" by WINNING - that is taking direct action to affect the outcome. the problem is when you can bet against yourself losing and then affect that outcome to become reality really easily. that's a shitty business for the guy who takes the bet, or insures it - and it's the betting houses job to work against that, because otherwise they'll go out of business real soon. the way it's done in sports is that they'll get lifetime bans for throwing a match on leagues which are financed through betting money. and giving bets on leagues you have no control over in such a way.. well, it's friggin risky - the players might clean you out.

tl;dr Who Cares? (0)

Anonymous Coward | about a year and a half ago | (#42172541)

You seem to have way too much time on your hands.

Re:tl;dr Who Cares? (1)

Mitchell314 (1576581) | about a year and a half ago | (#42172825)

There are people who's job is to think and work with these kind of problems. And some of them get paid nauseatingly large amounts of money. And anyways, since when is being inquisitive and analytical a bad thing?

Re:tl;dr Who Cares? (1)

gr8_phk (621180) | about a year and a half ago | (#42173005)

since when is being inquisitive and analytical a bad thing?

Since someone is letting him use slashdot as a blog - for things he admits changing his mind on in under week.

Poker advice applies to all betting (3, Interesting)

SirGarlon (845873) | about a year and a half ago | (#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?

Re:Poker advice applies to all betting (2)

CdBee (742846) | about a year and a half ago | (#42172659)

If you have a pension plan you are already wagering in a market of unknown fairness.

Re:Poker advice applies to all betting (3, Insightful)

HornWumpus (783565) | about a year and a half ago | (#42172677)

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

Re:Poker advice applies to all betting (3, Insightful)

Maxo-Texas (864189) | about a year and a half ago | (#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:Poker advice applies to all betting (0)

Anonymous Coward | about a year and a half ago | (#42172777)

It is, in fact, known to be unfair.

Attempts to remedy this situation end up making no one happy.

Re:Poker advice applies to all betting (1)

Archangel Michael (180766) | about a year and a half ago | (#42173981)

Attempts at remedy are also not fair. But that doesn't stop a whole bunch of people from trying to fix it, repeatedly, trying to remedy the new "unfairness" that crops up.

Re:Poker advice applies to all betting (0)

Anonymous Coward | about a year and a half ago | (#42172807)

If you are alive, you are wagering in a market of unknown fairness.

(just to catch the smartasses who claim to live in collectives that somehow technically aren't "countries")

Re:Poker advice applies to all betting (1, Offtopic)

Archangel Michael (180766) | about a year and a half ago | (#42173951)

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 fair. How we react to outcomes, is how you measure a man.

Re:Poker advice applies to all betting (1)

HornWumpus (783565) | about a year and a half ago | (#42174495)

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.

Re:Poker advice applies to all betting (1)

AK Marc (707885) | about a year and a half ago | (#42175055)

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.

Re:Poker advice applies to all betting (1)

lucm (889690) | about a year and a half ago | (#42174041)

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

Re:Poker advice applies to all betting (2)

booyoh (2511204) | about a year and a half ago | (#42173029)

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".

Re:Poker advice applies to all betting (1)

mcl630 (1839996) | about a year and a half ago | (#42174799)

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

Re:Poker advice applies to all betting (2)

Archangel Michael (180766) | about a year and a half ago | (#42173877)

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.

tl;dr (0)

Anonymous Coward | about a year and a half ago | (#42172591)

Way too verbose.

You can't bribe me! (1)

Anonymous Coward | about a year and a half ago | (#42172607)

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.

lol (0)

Anonymous Coward | about a year and a half ago | (#42172619)

"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."

Well, yeah, duh.

That's EXACTLY how bookies 'cover' the spread on betting to insure they always make a profit in the first place.

So... (2)

M0j0_j0j0 (1250800) | about a year and a half ago | (#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.

"prediction markets" (0)

Anonymous Coward | about a year and a half ago | (#42172635)

Solution: Stop regulating things.

(If this post wins, I want you to keep the money. You deserve it for all you've done for Internet activism, and I've used your proxies numerous times.)

Re:"prediction markets" (0)

Anonymous Coward | about a year and a half ago | (#42173161)

That is so thoroughly explained and well-argued I don't see how it couldn't win!! You are a genius! Your logic is infallible! Idiot.

Re:"prediction markets" (0)

Anonymous Coward | about a year and a half ago | (#42173245)

That is so thoroughly explained and well-argued I don't see how it couldn't win!! You are a genius! Your logic is infallible!

Thanks!

Idiot.

Y-you, too.

WTF? (2)

HornWumpus (783565) | about a year and a half ago | (#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.

Re:WTF? (0)

Bieeanda (961632) | about a year and a half ago | (#42174179)

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.

Talk to Chuck (1)

Anonymous Coward | about a year and a half ago | (#42172655)

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

"Analogous to a stock" (0)

Anonymous Coward | about a year and a half ago | (#42172681)

This sort of fixed-price-into-the-future already happens in the stock market all the time, with regulatory and board blessing: stock mergers. The two boards agree that the new shares will be divvied up on the basis of the price ratio between the old stocks on some future last day of trading.

You can always make huge bets. (0)

Anonymous Coward | about a year and a half ago | (#42172685)

The election is already a huge manipulatable gambling arena. The owners of say... Halliburton, have huge financial incentives for an outcome. You can go make huge bets on the outcome by buying the correct exchange traded companies.

Re:You can always make huge bets. (5, Interesting)

skids (119237) | about a year and a half ago | (#42173109)

This. And that's not the least of what worries me about this betting. Consider this scenario:

Some bigwig figures he can get a financial break from a candidate worth 10x a political contribution, based on whatever happens in a smoke-filled-room, if the candidate receiving the contribution wins.

He then spends that 10% of the desired return on campaign contributions, and then goes over to e.g. Intrade where, early in the election, odds are fairly even. He takes a bet out on the opponent of the guy he just supported of equal value to the campaign contribution.

If his campaign contribution works and the favor is curried, he's up in cash by virtue of the politician's kickback being worth more than the bet he placed. If it doesn't then he has no loss -- the money he won betting on Intrade covers the cost of the dud political contribution.

This amounts to risk-free bribery on the financial plane. (As to the risk on the legal plane for having such a conversation in a smoke-filled room, that's another matter.)

Re:You can always make huge bets. (3, Interesting)

WaywardGeek (1480513) | about a year and a half ago | (#42173801)

Brilliant proposal. In September, when Obama was at 80% on Intrade, I asked on a blog why betters were so confident, given the likelihood of an "October surprise." The best answer was from a guy who said he was "hedging his bets" buying Obama stock. If Obama wins, he said his taxes would go up, but at least he'd make money on Intrade.

I doubt there's a better way to get rich than buying up land (or other assets), and then paying politicians to make it more valuable. You can do it in towns all across America. It's almost entirely legal. I mean, why wouldn't you contribute to the guy who's in favor of the development you seek? Why wouldn't you throw a fundraiser for him, and why would anyone think less of you for doing so? Many towns wind up with a greedy combination of politicians and developers running the place.

Another interesting thing on Intrade was watching the guy who was trying to manipulate the market dump around $2M selling Obama stock. For several days before the election he repeatedly dumped many thousands of dollars all at once, tanking the market back down to about 60%, and then let it recover. The fact that he did it so consistently, every half hour to an hour, made it clear to anyone watching trades that there would be plenty of future opportunities to buy Obama stock at $6. So why did it rapidly recover every time? Two theories: first, it's possible and maybe even likely that most betters were not watching carefully, and were simply paying whatever the price happened to be when they logged on. Second, it's possible that a pro-Obama manipulator was constantly buying through small trades, regardless of the price. I'd love to know what actually happened.

Re:You can always make huge bets. (1)

khallow (566160) | about a year and a half ago | (#42174677)

Well, that's how hedging works and the bigwig would be using the market as most people think it should be used (speculation gets a bad rap here). The bribery still has risk since the candidate need not actually do what the bigwig wants. If you're giving money to a campaign and expecting more in return, then that's incentive for the politician to shake you down for more. You also might have some other bigwig with conflicting interests and bigger campaign donations.

this isn't your blog (0)

Anonymous Coward | about a year and a half ago | (#42172687)

go post this shit on tumblr or twitter or someplace I won't accidentally see it.

Re:this isn't your blog (0)

HornWumpus (783565) | about a year and a half ago | (#42172713)

/. needs a way to mod down articles.

Second Foundation (2)

gmuslera (3436) | about a year and a half ago | (#42172689)

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.

So you've discovered arbitrage (0)

Anonymous Coward | about a year and a half ago | (#42172699)

Congratulations.

Re:So you've discovered arbitrage (1)

greg1104 (461138) | about a year and a half ago | (#42174593)

Discovered, but doesn't quite understand how it works in the real world yet. If you allow unlimited betting and there are two "exchanges" that give different odds, what happens next is that someone will place arbitrage bets on the pair until they are even. This is how trading markets force that sort of gap to zero once it appears.

Most trading vehicles come with some sort of spread between the buying and selling price, like the "bid" and "ask" for stocks. That small loss is the only real limit keeping people from exploiting any tiny gap between offers across markets into an arbitrage profit. Even if the profit per share on a trade is 0.01, put enough volume behind that and it turns into real money. But if you make entering and existing a trade typically result in a 0.01 loss--due to the difference between the bid and the ask--that puts a lower limit on how small of an arbitrage gap can be traded profitably. Adding a per-transaction fee is also useful for that.

Traditional gambling, via something like a bookie or a casino, doesn't have this problem because the odds aren't symmetrical. They are not a market that allows someone to play all sides of a bet and come close to breaking even. Roulette [wikipedia.org] is a good example, where the zero value on the wheel makes it unprofitable to try and cover the board with a red/black or even/odd pair of bets.

Misunderstanding of stock markets (5, Informative)

scheme (19778) | about a year and a half ago | (#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.

Re:Misunderstanding of stock markets (1)

Ichijo (607641) | about a year and a half ago | (#42173075)

[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.

Re:Misunderstanding of stock markets (2)

scheme (19778) | about a year and a half ago | (#42173263)

[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.

Re:Misunderstanding of stock markets (0)

Anonymous Coward | about a year and a half ago | (#42173873)

Interesting stuff. Thanks for posting :D (not sarcasm)

Re:Misunderstanding of stock markets (1)

Ichijo (607641) | about a year and a half ago | (#42174345)

That's only an issue of liquidity.

Re:Misunderstanding of stock markets (1)

codewarren (927270) | about a year and a half ago | (#42173127)

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.

Re:Misunderstanding of stock markets (1)

scheme (19778) | about a year and a half ago | (#42173349)

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't affect Intel directly or give it more money. Intel would have to sell it's stock on an exchange or put it up for collateral or something similar if it wants to take advantage of the rise in it's stock.

To use an analogy, if the value of your house or car went up by $50k, that wouldn't directly help you out. You would have to sell it or take out a loan against it or something similar if you wanted take advantage of the rise in value. Likewise, stock prices don't directly help companies, contrary to what the submitter says.

Re:Misunderstanding of stock markets (1)

SleazyRidr (1563649) | about a year and a half ago | (#42173453)

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 how the stock market works falls a little short.

Re:Misunderstanding of stock markets (2)

ceoyoyo (59147) | about a year and a half ago | (#42173993)

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.

what is this (-1)

Anonymous Coward | about a year and a half ago | (#42172725)

pile of garbage post? this was an utter waste of my time.

A couple of problems in your reasoning (0)

Anonymous Coward | about a year and a half ago | (#42172769)

Right off the bat, I noticed a couple of problems in your writeup.

First, this is a bit of a tangential point to your post, but I just can't let it slide because of how wrong it is, so: you say "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" - this suggests you fail to understand how secondary markets work. When you buy some outstanding shares of stock on an exchange, the issuing company sees absolutely none of that money. The company only gets money at the time of initial issue. Subsequent trades between individual owners of shares make no impact on the amount of cash the company has. (Like buying a used Ford on craigslist - Ford the motor company doesn't get any of that money.)

Second and more to the point - you assume that if "the manipulator" artificually raises the odds of candidate X winning, it'll actually encourage people to go vote for candidate X. Why wouldn't it encourage people who instead like candidate Y to put in more effort to campaign/vote for him? While at the same time make people who prefer candidate X more complacent and less likely to show up to vote? It's not easy to tell what would 'actually happen' as a result of manipulated odds - if anything at all! People are complex enough that for all the theories one can spin about it, the only way to know is to actually try a bunch of empirical experiments - and even then, there are enough variables that you can't really be sure if it'll play out the same way in a real election.

In all, your 'concerns' are based on completely ungrounded speculation of what would happen to people's actual voting pattern and effort outlay if someone were to manipulate the odds. Whereas the economists' position is based on well-tested theory, and a long empirical history, of just how difficult it is to actually 'manipulate' the market and make a profit, other than in certain limited circumstances.

Now granted, a prediction market may have some unique characteristics that probably deserve further study, bu that's just about all one could fairly say about the situation.

Re:A couple of problems in your reasoning (2)

nedlohs (1335013) | about a year and a half ago | (#42172865)

A higher share price (for the same number of shares, obviously) makes it easier for the company to get more money though. They can issue new stock or more likely be able to borrow more money. Though the statement you quote does seem to imply a direct transfer of cash which certainly isn't the case.

Re:A couple of problems in your reasoning (1)

vlm (69642) | about a year and a half ago | (#42173023)

A higher share price (for the same number of shares, obviously) makes it easier for the company to get more money though. They can issue new stock or more likely be able to borrow more money. Though the statement you quote does seem to imply a direct transfer of cash which certainly isn't the case.

Enormously important for acquisitions.

vlmdotcom inc stock price $10/share, 1M shares outstanding, I wanna buy drkoopdotcom for $100M ... um... somethings not adding up in the balance sheet there

vlmdotcom inc stock price $1000/share same 1M shares outstanding, I wanna buy drkoopdotcom for $100M... OK lets talk, I'll dilute my current shares by 10% and exchange those new shares for full ownership of all your patents and blah... etc etc.

Re:A couple of problems in your reasoning (1)

gr8_phk (621180) | about a year and a half ago | (#42173059)

A higher share price (for the same number of shares, obviously) makes it easier for the company to get more money though. They can issue new stock or more likely be able to borrow more money.

No it doesn't. Issuing new shares dilutes the stock and the price will change almost over night to reflect that change. The selling of the new shares will still bring in money, but this is independent of the price - almost. The amount of dilution required to bring in a particular amount of money will depend on the valuation of the company. But short term IIRC this doesn't work anyway because the company will probably have to do a vote on issuing new shares which will take some time and will not be able to benefit from a short-term market manipulator.

What? (1)

Jiro (131519) | about a year and a half ago | (#42172831)

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 enough financial background or investment experience. In other words, to prevent him from losing his life's savings.

Of course, soon after that was the dot.com bust. I bet that guy stopped complaining at that point.

If you suddenly got a great investment idea, are planning using a large portion of your personal wealth to buy stocks, and have no experience in the stock market, the organizations involved will try to stop you from losing your life's savings, even if the barrier isn't perfect.

Re:What? (1)

ceoyoyo (59147) | about a year and a half ago | (#42174071)

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 produced. Predictions markets, just like the casino, have a negative expected value because they are zero sum games with a rake for the house.

The author does seem to make a basic mistake - everything he wrote assumes that there is no barrier to the flow of "goods" from one market to the other. If a prediction "market" is banned for many investors because it has no caps, there will be a significant barrier to arbitrage investment. Take for example his hypothetical example of a Saudi prince manipulating US elections through predictions markets. The prince may invest in the banned-to-the-US no-cap market but the US-approved capped market will not be affected as much because most of it's investors can't invest in the no-cap market. The no-cap market will just be some international scam while the US-available market will be seen as reliable.

All of this is stupid anyway - if people are dumb enough to change the way they vote based on organized gambling then they're probably dumb enough to be swayed by much more direct manipulation.

Re:What? (1)

AK Marc (707885) | about a year and a half ago | (#42175475)

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 triggering an "almost win" response in their brain. Almost feels like a win, and compels a subsequent try.

Wow, /. has discovered arbitrage. (0)

Anonymous Coward | about a year and a half ago | (#42172833)

Isn't it amazing that /. finally has discovered arbitrage? Or the reason why wage and price controls backfire, the reason why government controls don't work and create situations where people can make a difference buying or selling in 2 different markets, where one is regulated by government and another is in a more free state of being?

If things keep going this way in 5 years time /. will figure out why fake government interest rates create false signals in the market and cause bubbles to form with misallocation of resource.

sig [slashdot.org]

Not really a problem... (2)

clong83 (1468431) | about a year and a half ago | (#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.

Re:Not really a problem... (1)

spitzak (4019) | about a year and a half ago | (#42173567)

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.

Re:Not really a problem... (1)

clong83 (1468431) | about a year and a half ago | (#42173913)

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. That only means they will now more or less move in tandem (ignoring further manipulation) to the equilibrium, presumably 4:1.

Analogy: Suppose there is an active weather prediction market, and someone manipulated it heavily for whatever reason. You notice one morning that there are 2:1 odds that it will rain tomorrow. You check several markets, and they all have the same odds. You check, and the weatherman says there is a 90% of rain. Do you take the bet? I bet the markets see some big bets and heavy volume until the odds go up to approximately 9:1...

TL;DR: If the odds don't match what the "crowd" thinks, then the "crowd" will bet untill it does. The crowd will exploit the easy money left on the table by the manipulator, and if the odds aren't right, the "crowd" will continue to bet until it matches the groupthink, regardless of the manipulator.

Caveat: Of course, with deep enough pockets, manipulators can have an effect regardless of volume. That's true in any market. So again, I fail to see what the point is... It's certainly not peculiar to prediction markets.

Missing the point (0)

Anonymous Coward | about a year and a half ago | (#42172877)

I was in favor of them because they're useful insofar as they can harness the wisdom of crowds to convey important information.

Markets do not exist because they are "useful" according to some arbitrary measure. They exist because people want to trade a certain good (and yes, speculation is a valid reason to engage in trade). This is the sole motivation for a market of any kind. Human activity, in general, does not take place because some wise men decided that the activity in question is appropriate, but because the participants see a benefit in engaging in that particular activity.

Also note that classifying activities as "useful" and "not useful" is non-sensical unless you specify to whom they are useful or not useful. And no, society is not a proper subject in this matter. It is non-sensical to argument about the benefits to society. It only makes sense to talk about the benefits to an individual or a group of individuals who share a common goal. The goal has to be identifiable and not loosely defined.

There is also the matter of who will decide between "useful" and "not useful". If people go down that road they will end up living in a totalitarian society.

Huh? (4, Interesting)

mcmonkey (96054) | about a year and a half ago | (#42172923)

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.

Unregulated prediction market (0)

Anonymous Coward | about a year and a half ago | (#42172933)

So what happens if http://betsofbitco.in or some other prediction market that the US government finds it can't shut down becomes popular?
If this is so dangerous, what if a state put its resources behind it?

Presupposition (4, Insightful)

Chuckstar (799005) | about a year and a half ago | (#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.)

Re:Presupposition (1)

ceoyoyo (59147) | about a year and a half ago | (#42174115)

"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.

Re:Presupposition (1)

greg1104 (461138) | about a year and a half ago | (#42174685)

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 platform [arstechnica.com] for building software.

Re:Presupposition (1)

ceoyoyo (59147) | about a year and a half ago | (#42175465)

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?

Re:Presupposition (0)

Anonymous Coward | about a year and a half ago | (#42174527)

I agree. I read this article(s) and thought, "So people trying to manipulate the market are handing out free money and getting next to nothing in return. The $100 solution is to stop worrying." Sadly, I bet won't get my $100.

non sequitur (0)

Anonymous Coward | about a year and a half ago | (#42172987)

There is no reason to assume the two exchanges will have different odds. Furthermore, gamblers attempting to tip the balance by purchasing bets in the uncapped exchange will drive the odds in both exchanges. Duh?

Mob rule or science? (0)

Anonymous Coward | about a year and a half ago | (#42172991)

This strikes me as another discussion suggesting mob rule is a good substitute for fundamental truth. For decades people in financial markets have suggested mob rule is the best method of predicting prices based on supply & demand theory. Yet time and time again we see "irrational" financial bubbles, which have nothing to do with real surpluses or shortages, grow and bust. Future market prices are set by mobs, but future supply & demand changes are not known.

To me this is similar to suggesting the internet contains all human knowledge. This may seem true when you're in high school, but falls apart when your actually developing products. There are no blueprints or raw data for future devices or technologies on the internet, which is why most all companies fund private R&D groups.

Rich gamblers can't buy elections, they can only disrupt predictions leading up to the real election.

Re:Mob rule or science? (1)

khallow (566160) | about a year and a half ago | (#42174913)

This strikes me as another discussion suggesting mob rule is a good substitute for fundamental truth. For decades people in financial markets have suggested mob rule is the best method of predicting prices based on supply & demand theory. Yet time and time again we see "irrational" financial bubbles, which have nothing to do with real surpluses or shortages, grow and bust. Future market prices are set by mobs, but future supply & demand changes are not known.

Show us something better. Markets work amazingly well. Even those bubbles and bursts cull traders who follow the herd. What else is so effective at that? Fundamental truth is at best, an ideal. IMHO, markets do a better job of approaching that ideal than anything, including the scientific method, for evaluating the value of financial securities.

To Clear Some Stuff Up Here (1)

eldavojohn (898314) | about a year and a half ago | (#42173001)

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. If the Yankees (a good baseball team) were playing the Houston Astros (one of the worst baseball teams and yes, I know thye're not in the same division) there would be two types of bets for each team. The money line and the spread. The money line bet is is simply that they beat the other team. The spread bet has different odds and usually requires one team beat another team by X points. The spread bet often pays close to 2:1 because the people who calculate those odds that then fluctuate are saying it's 50/50 where it comes down on that line. Then they lower it a bit for their cut. Often times, the bet for the Yankees to beat the Astros just won't be offered. Let's say that if you bet the money line on the Yankees you get $1 for every $100 you bet. Not a great payout but you have to worry about a millionaire showing up and putting a million down and fleecing you for $1,000. As a result there is no way to bet the money line on "for sure" games. Of course if you want to bet money line on the Astros, they'll gladly take your money at, say, 20 to 1 odds. I've been in Vegas during march to watch my alma mater get bounced, I know they'll smile as they take your money on those longshot bets. But they won't let the converse bet happen. There simply is no long tail that they continually push out.

Likewise if you were a capped exchange and you felt like you were getting fleeced, you would simply stop offering that prediction. Sometimes bets and prediction aren't offered just because there's too much randomness that can't be seen yet. Is there something forcing these prediction exchanges to post all possible outcomes?

Re:To Clear Some Stuff Up Here (0)

Anonymous Coward | about a year and a half ago | (#42173281)

They do let those bets happen. Ask an oddsmaker there and they'll tell you their job is not to "win" for the sports book, but to set initial odds such that money comes in "evenly" on both sides, and in the best case is so close to "even" that little revision is necessary. The casino makes its money on the 5% of the handle that gets pulled from the payout.

Re:To Clear Some Stuff Up Here (1)

vlm (69642) | about a year and a half ago | (#42173371)

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 like selling a $1 contract for 0.05 or 0.95. most commission structures are strongly biased against that. Of course if a lunatic is trying to make a statement instead of a profit, they don't care about commissions, which was kind of the point of the article...

One common play to work around that is multiple contracts.
"This contract pays $1 if Rmoney loses by more than 5% popular vote" how much will you pay for it today?
"This contract pays $1 if the margin is 5% popular vote or less" how much will you pay for it today?
"This contract pays $1 if Obama loses by more than 5% popular vote" how much will you pay for it today?
At least in theory, one of these guys will be around 50 cents even if the others are dead no trading around $1 or $0.

Is there something forcing these prediction exchanges to post all possible outcomes

The "house" so to speak is hungry for commissions... the players are hungry not to pay them... usually financially structured such that ridiculous bets make the "house" most of the money and the players the least. The following is grossly simplified. Lets say the house charges a penny. You sell at .51, I buy at .49, house eats a penny from each of us. Regardless of who wins, the house eats about 2 percent of our annual contract revenue, assuming we always play around 50/50 odds. But if you start selling at .04 and I buy at .02 suddenly the blasted house commissions are eating somewhere around 25 to 50 percent of our profits. So pros don't play long odds unless they've got a really good reason (which, often they do, assuming you have a very optimistic view of counterparty risk its ok for insurance, for example)

Bet on Black (0)

Anonymous Coward | about a year and a half ago | (#42173027)

I bet on Obama winning, so that way I could make some money, just like the people that voted for him.

What predictions become self-fulfilling? (2)

roystgnr (4015) | about a year and a half ago | (#42173047)

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.

How about a reputation system instead? (0)

Anonymous Coward | about a year and a half ago | (#42173069)

I cannot find any flaw in your argument, but I am not sure that I agree with the premise that money is the best motivator, or that it is a necessary one. I think a system based not on bets, but on a reputation system like that used by stack overflow would be much more robust, as reputation would have to be earned via accurate predictions rather than effectively bought with money as in a betting system. It may be surprising to economists, but many people find a high reputation to be a reward in itself, and do need an extra monetary reward - again, look at stack overflow for an example of this in practice.

insane / solvent etc (1)

vlm (69642) | about a year and a half ago | (#42173129)

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 moneybomb activity.

Another way to look at it, is we've basically got a representative bribe-o-cracy right now where the lobbyist with the most PAC funds to donate "influences" if not outright controls the elected official. Its not any more corrupt to just purchase the elected official on an exchange. In fact its much more honest.

It's not a "market", it's a gambling platform (1)

sirwired (27582) | about a year and a half ago | (#42173133)

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.

Re:It's not a "market", it's a gambling platform (1)

khallow (566160) | about a year and a half ago | (#42174977)

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 understanding. They're both betting markets with securities whose value is solely based on concrete future events.

Not a financial market phenomena (1)

vlm (69642) | about a year and a half ago | (#42173157)

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 shade umbrellas for groundhogs?

What rot! (1)

Anonymous Coward | about a year and a half ago | (#42173215)

... 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 shareholder thinks certain shares will appreciate faster than the current time-value of money, (because so many companies do attempt to manipulate their share price) he can make a profit by short-selling.

TL;DR: Multiple markets always cause arbitrage. Having capped/uncapped investments simply changes the process of profiting from that arbitrage.

Market manipulation by the Underpants Gnomes (0)

Anonymous Coward | about a year and a half ago | (#42173469)

1. Make big bet on uncapped market
2. Wait for odds on all markets to converge
3. ???
4. Profit

Who cares? (1)

nedlohs (1335013) | about a year and a half ago | (#42173529)

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.

after reading these post's i conclude... (0)

Anonymous Coward | about a year and a half ago | (#42173623)

Many of you should not step near a computer.
You know very dangerous snippets of information about markets, gambling, financing, arbitrage, and math.
But you really suck at applying this information.
But keep plugging away at it. We need marks.

Solution: $1 million minimum trade (1)

raymorris (2726007) | about a year and a half ago | (#42173633)

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 wouldn't be involved. It would only be used by people and companies who are really affected by these events, who would think carefully about what kind of hedge really makes sense.

Yes and no (1)

Moses48 (1849872) | about a year and a half ago | (#42173635)

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?

Seems like the cap would still work (1)

spitzak (4019) | about a year and a half ago | (#42173649)

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?

stock market non-analogy is wrong (1)

Skewray (896393) | about a year and a half ago | (#42173883)

"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.

My counter-argument (0)

Anonymous Coward | about a year and a half ago | (#42174431)

STFU and GTFO. And dammit Samzenpus, quit posting shit from this moron.

Here's how to save yourself $100 (1)

khallow (566160) | about a year and a half ago | (#42174617)

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 rather unique markets.

So as you're thinking of it, it's not a real problem. The big market will push the small market, but most people trading on the small market would want that since it gives them a more accurate price and maybe a bit of liquidity from the arbitragers.

Second, uncapped markets have the potential for considerable moral hazard as the market capitalization grows. If there's a trillion dollars on who becomes the next US President, you can bet a lot of people with a lot of money are going to have some ideas, both legal and illegal, about how they can improve the odds in their favor. That's why real life markets of this sort (such as futures markets) have caps.
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