A Critique of Prediction Markets
2 days ago
- #prediction-markets
- #financial-markets
- #reflexivity
- Prediction markets are gaining popularity with platforms like Polymarket and Kalshi seeing significant trading volumes.
- Financial markets thrive on standardized products, many participants, low transaction costs, and heterogeneous risk preferences—features prediction markets lack.
- Prediction markets are binary, making them hard to hedge and limiting liquidity providers' ability to manage risk.
- Without natural hedgers, prediction markets rely on noise traders (gamblers) and sharps, leading to unsustainable dynamics.
- Prediction markets suffer from reflexivity—their existence can influence the outcomes they aim to predict, distorting reality.
- Large prediction markets can amplify negative societal outcomes by incentivizing manipulation of rare or harmful events.
- Unlike financial markets, which often create positive externalities, prediction markets tend to foster negative or irrelevant outcomes.
- The author argues that prediction markets are poorly designed and harmful, advocating for regulatory intervention to curb their growth.