We should try to be more careful about our distinctions and definitions. I’-m less concerned about whether we use the phrase “-prediction market,”- “-information market,”- “-decision market,”- or whatever- I’-m more concerned about what exactly these phrases are intended to mean. Here are some possible concepts to distinguish (I’-ll avoid naming them).
- Markets that make predictions – Pretty much every speculative market ever created does this.
- Markets that make easily interpreted predictions – Most betting markets would be included here, while most financial markets would not. For financial markets one must understand and estimate risk premia, discount factors, and so on be able to say much what exactly the current price estimates.
- Markets whose prices embody information – Also pretty much every speculative market ever made.
- Markets whose price predictions are used as info by non-traders – Many financial markets meet this criteria.
- Markets whose interpretable predictions are used as info by non-traders – Many betting markets meet this criteria.
- Markets whose primary function is not hedging – A “-primary”- function would most explain the existence of the market and its volume of activity. Most financial markets might fit here, as most volume is from speculation.
- Markets where the main trader motivation is not material gain – Most play money markets would fit this criteria.
- Markets where the social value of allowing the market to exist outweighs the social cost – this would be the sort of market we want to legally allow to exist.
- Markets where the social value of the info gained by non-traders, but not the social value of its use for hedging, outweighs any other social costs of allowing the market to exist – These markets could justify a legal regime empowered to allow markets to exist for info reasons, not just hedging reasons.
- Markets whose primary function is to inform non-traders – Non-trader interest in the info would be the main explanation for the existence of the market and the volume of trade- such non-traders would somehow subsidize the existence of the market and trading activity in order to gain the info they desire.
These last two concepts are of the most interest to me – I would like to have names that clearly identify them and distinguish them from the other concepts.