Let's be real here: No one will use prediction markets to hedge risks. Binary options are poor instruments for hedging and have nearly no legitimate uses that could not be done better with existing instruments like futures or insurance contracts with linear payoffs. That's why binary options are illegal in much of the world. If someone wanted to hedge their tax risk with Mamdani, they would hedge it directly with a contract that scales payoffs based on incremental tax paid, rather than take an indirect yes/no bet on Mamdani winning. Contracts like these are already thickly traded and are the real prediction markets.
There will be no institutional volume in the prediction markets because they aren't actually useful compared to existing markets. Binary options are bad for hedging. People want to hedge risks directly, not on events that indirectly affect their risks. The truth machine you want has already been built. You just access it through Bloomberg terminals and phone calls with your derivatives dealer.
Prediction markets are federally sanctioned sports betting. That's all. It's that simple. There's no there, there. You're mistaking the tail for dog. The "truth machine" narrative is a smokescreen to cover the mass violation of state gambling laws. We should just be honest about this. That's the real "truth machine" here.
Perhaps we're all on the same team? The point of the OP is that the potential social value of prediction markets is not yet realized and change is needed.
I appreciate your point about binary options limited hedging value for most institutions, but if I were providing insurance I'd be happy to have a prediction market probability... and maybe then I want to use that market to hedge a bit too... even if it's not the best hedge for most institutions, some events are relevant to many different risks.
Really great post, and the website you spun up was informative.
I agree we need more institutional hedgers in Prediction Markets, but I think some of the mechanisms on how to increase it is missing. There's a robust set of institutions and exchanges for commodity futures that is defined and operated by huge players (really taking off with the Chicago Board of Trade), which has provided liquidity and pricing to investors and enterprises. It seems underlying this analysis is a need to restructure this market from B2C to B2B to get the right levels of liquidity to improve predictions, at least to get the flywheel started. And as is obvious with every product, B2C and B2B products have different requirements and GTM strategies. Enterprise grade curation (mentioned) and strategies for developing money-pooling mechanisms through B2B business models or highly curated/marketed exchanges (not mentioned) proactively need to be developed.
Let's be real here: No one will use prediction markets to hedge risks. Binary options are poor instruments for hedging and have nearly no legitimate uses that could not be done better with existing instruments like futures or insurance contracts with linear payoffs. That's why binary options are illegal in much of the world. If someone wanted to hedge their tax risk with Mamdani, they would hedge it directly with a contract that scales payoffs based on incremental tax paid, rather than take an indirect yes/no bet on Mamdani winning. Contracts like these are already thickly traded and are the real prediction markets.
There will be no institutional volume in the prediction markets because they aren't actually useful compared to existing markets. Binary options are bad for hedging. People want to hedge risks directly, not on events that indirectly affect their risks. The truth machine you want has already been built. You just access it through Bloomberg terminals and phone calls with your derivatives dealer.
Prediction markets are federally sanctioned sports betting. That's all. It's that simple. There's no there, there. You're mistaking the tail for dog. The "truth machine" narrative is a smokescreen to cover the mass violation of state gambling laws. We should just be honest about this. That's the real "truth machine" here.
Perhaps we're all on the same team? The point of the OP is that the potential social value of prediction markets is not yet realized and change is needed.
I appreciate your point about binary options limited hedging value for most institutions, but if I were providing insurance I'd be happy to have a prediction market probability... and maybe then I want to use that market to hedge a bit too... even if it's not the best hedge for most institutions, some events are relevant to many different risks.
Linking a recent design I worked on that tries to minimize subsidies required for useful prediction markets - https://virajnadkarni.substack.com/p/two-uses-of-knowledge-in-society
Really great post, and the website you spun up was informative.
I agree we need more institutional hedgers in Prediction Markets, but I think some of the mechanisms on how to increase it is missing. There's a robust set of institutions and exchanges for commodity futures that is defined and operated by huge players (really taking off with the Chicago Board of Trade), which has provided liquidity and pricing to investors and enterprises. It seems underlying this analysis is a need to restructure this market from B2C to B2B to get the right levels of liquidity to improve predictions, at least to get the flywheel started. And as is obvious with every product, B2C and B2B products have different requirements and GTM strategies. Enterprise grade curation (mentioned) and strategies for developing money-pooling mechanisms through B2B business models or highly curated/marketed exchanges (not mentioned) proactively need to be developed.