Prediction Markets Definitions - REDUX
Chris F. Masse November 22nd, 2006
Markets whose primary purpose is capital raising or sharing/hedging risks => Financial markets
Markets whose primary purpose is to aggregate information about the expected outcome of an event => Prediction markets
Markets whose primary purpose is to facilitate taking financial stakes in the outcome of events for entertainment purposes => Betting markets
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I have cranked up Deep Thought and I have read the smudged ticker tape it spewed out:
“Prediction markets differ from betting markets in one essential respect: Event Isolation”
The events in prediction markets tend to be significantly influenced by their environment and/or have ramifications in that environment, whereas betting markets tend to prefer more isolated, ‘fairer’ events precisely in order to level the playing field for participants - egalitarianism, an equal opportunity for all punters to improve the accuracy of their estimates with information equally accessible to all. Favouring inconsequential events also helps reduce any esoteric bias due to pressure from those affected by consequences.
Whether there is more utility in one market than the other is an epiphenomenon. A prediction market doesn’t arise because the predictions of its participants are of interest to non-traders. It arises because the events are of interest to its traders - perhaps because they have specialist knowledge they’re happy to test against those who fancy their own knowledge.
Markets are not defined by the purpose of non-traders, but by the purpose of the traders (to trade information and money contingent upon future events).
Purpose describes the interest of non-traders, who find epiphenomenal utility arising in markets.
That said, it is of course possible for non-traders to construct marketplaces that facilitate a class of market of interest to them.
So, markets should be described in accord with the interests of the traders and what they are trading - not the purpose of those who created the marketplace.
You wouldn’t say that the purpose of fish markets was piscatorial sampling - simply because you were a marine biologist who found them useful in that way. Would you?
I think the distinction between the three is pretty, well, “academic.” (Did I just hit a ‘pet peeve’ button somewhere?) Some people bet on things primarily for entertainment purposes, and some primarily for financial purposes, but the money factor almost always commands SOME importance–which means that arbitrage will occur between the “entertainment”/prediction markets versus the financial(in Prof Zitzewitz’s definition) markets. And exchanges around the world exist for pretty much one purpose: to make a profit. Same goes for the traders, and if one market exhibits generally unprofitable behavior, eventually a wary financial type will find it and aggregate that information to his/her advantage.
Even weather contracts, the classic “only true gamblers would do that” market, could/should be traded upon by people closer to the climatology/weather forecasting industries and communicate more accurate information, as well as transfer money to the better-informed traders, serve a “gamblers’ rush” purpose to the gamblers, and serve a hedging purpose for an interested party.
In the long run, all three kinds of markets should do all three of those things equally. So the distinction becomes pointless, in my opinion.
Distinctions might help with regulatory issues, but I generally don’t find taxonomies to be very productive.
I agree Jason.
It’s no good attempting to evade predation by the vice squad by inventing a spectrum segmentation scheme in order to exclude onself from the bad guys.
If you make a deal whose outcome is contingent upon a future event then you’re participating in a contingency market.
If the causation of the event is independent of the traders then it’s a prediction market.
If the causation and ramifications of the event are independent of the traders then it’s a den of iniquity and should be shut down immediately by the vice squad.
It’s probably simpler just to say “Anyone caught rubbing their hands with glee, exclaiming ‘Come on my son!’, or simply wearing an inane grin, is guilty of trading in a market for the illegitimate purpose of entertainment.”
If a fish market would not exist had not a marine biologist created it in order to sample fish, well then yes I might call it a fish sampling market.
Distinctions have different uses to different people in different contexts. To let all these flowers bloom, we should create terms for the different concepts, so we do not confuse each other when we talk.
Yes, but, we’d get awfully confused if you called a screwdriver a tin opener simply because that was your intended use.
Why not simply say that screwdrivers are useful tin openers?
An ulterior motive however superior in power does not get to rename a conventional object.
You could perhaps introduce qualifier terminology, e.g. ‘artificial prediction market’, ’sponsored prediction market’, ’simulated prediction market’, etc.
Just as you can say ‘German screwdriver’ when describing a hammer (apologies to Germany).