“these discrete outcome markets are not very good for use in decision-makingâ€
I would actually argue strongly against this. What if you have an event that is indeed binary? (Say, GM will file for bankruptcy.) Credit default swaps are fundamentally such contracts and they serve a useful purpose for hedging, if used properly. For example, prices of such contracts can be used to evaluate the riskiness of a portfolio, without waiting for the rating agencies to re-evaluate the trustworthiness of a country, city, company, etc.
Niall, the name for the market is customized according to the intended audience. Target the “mass� Call it a betting/gambling market. Target investors? Call it a futures market. Target conservative households? Call it insurance…
Bankruptcies aren’t quite binary as average recovery rates for bondholders are above zero, so Paul might say that a continuous recovery rate market would be preferable to a binary one, although that would conflate the probability of bankruptcy with the expected recovery rate.
Like Panos, I am not ready to abandon binary markets. They are appropriate for certain questions, but the prevalence of that format on exchanges is driven by concerns other than decision-making, especially the ability to generate large % gains for traders when full margin is required of them.
Paul seems to be against discrete/binary markets but in reality, he points out that only high confidence markets are useful for decision making. The discrete/continuous dichotomy is largely irrelevant.
Paul essentially advocates having tight probability distributions for continuous variables. He is saying that just having the average right is not enough to consider a prediction a “success”. (I fully agree.)
The discrete equivalent of a tight distribution is a contract that has a very high price (i.e., high confidence).
It is largely stupid to call “successful” a continuous market that gets the average right but has a very high spread over the outcomes. Similarly, it is stupid to call a success a discrete market that is “correct” (i.e., the frontrunner being the actual outcome) when the contract price of the frontrunner is 15% or so.