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mattnewport comments on Arbitrage of prediction markets - Less Wrong
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Is there no value in defending the definition of a word? Arbitrage originally meant expected profits with zero risk of loss. Now some people say they also want to use it to mean expected profits with non-zero risk of loss. Okay, then why not just say "expected profits" (or "edge" as traders would call it) since you've eliminated the distinction that makes the term meaningful in the first place? I mean, would you say that the AGI I'm building in my basement is "Friendly" just because I expect it to do good things, even though it also might paperclip the universe 2% of the time?
Pure arbitrage pretty much never exists. There is almost always non-zero risk of loss. Arbitrage transactions invariably have some execution risk, though with very liquid markets and electronic trading it may be arbitrarily small. Generally the liquid markets with the fastest trading are those that will offer the least arbitrage opportunities though so in reality greater profits almost always come at the cost of increased execution risk. It doesn't seem a huge stretch to extend the concept to statistical arbitrage - you're never really going from zero risk to risk, you're just increasing from a very small risk to a larger risk and going from very reliable price correlations to less reliable ones.