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orthonormal comments on Open Thread: July 2010, Part 2 - Less Wrong
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I have a question about prediction markets. I expect that it has a standard answer.
It seems like the existence of casinos presents a kind of problem for prediction markets. Casinos are a sort of prediction market where people go to try to cash out on their ability to predict which card will be drawn, or where the ball will land on a roulette wheel. They are enticed to bet when the casino sets the odds at certain levels. But casinos reliably make money, so people are reliably wrong when they try to make these predictions.
Casinos don't invalidate prediction markets, but casinos do seem to show that prediction markets will be predictably inefficient in some way. How is this fact dealt with in futarchy proposals?
The most obvious thing: customers are only allowed to take one side of a bet, whose terms are dictated by the house.
If you had a general-topic prediction market with one agent who chose the odds for everything, and only allowed people to bet in one chosen direction on each topic, that agent (if they were at all clever) could make a lot of money, but the odds wouldn't be any "smarter" than that agent (and in fact would be dumber so as to make a profit margin).
But no casino has a monopoly on roulette. Yet the market doesn't seem to drive the odds to their correct values. Dagon notes above that regulations make it hard to enter the market as a casino. Maybe that explains why my naive expectations don't happen.
Actually this raises another question for me. If I start a casino in Vegas, am I required to sell roulette bets as though the odds were p = 1/36, instead of, say, p = 1/37 ?
[Edited for lack of clarity.]