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ozziegooen comments on [LINK] Bets do not (necessarily) reveal beliefs - Less Wrong
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If a market is being highly influenced by people hedging their bets, then there is significant arbitrage opportunities for others to make money offsetting that. Prediction markets with decent liquidity should be fine, and in fact the presence of a group with hedging interests presents more opportunities for others to do this arbitrage, helping the market.
People who make money offsetting hedging of bets are called "insurance underwriters". Remember, someone is covering those bets.
You appear to be unclear on the meaning of "arbitrage". Simply taking a position that has positive expected return is not arbitrage; it's just plain investing. Arbitrage has positive (or at least nonnegative) 'guaranteed' return. Arbitrage involves taking both sides of a bet, but with a spread. If a lot of people are "overpaying" for one side, that doesn't create arbitrage unless there's someone else "underpaying". In cases where people are hedging on both sides (for instance, corn growers hedge by selling corn futures, pig farmers hedge by buying corn futures), assuming an efficient market the effects of the two hedgers will cancel each other out and the price will converge on an equilibrium price. You would have arbitrage only if you have some special ability to sell to one and buy from the other that market participants in general do not have.
Casino owners are often said to be practicing "statistical arbitrage". What would you call it?
Is there a fundamental difference between 1) a casino's "really high" probability of earning a profit (on bets before expenses), 2) real-world true arbitrage, and 3) positive expected return in the large?
It seems related to the P=BPP problem, in which you can have confidence in a probabilistic solution that's higher than your confidence that your computer works, but which some people deem inferior to a deterministic solution coming from the same hardware.
Arbitrage is a radial category.