I've only watched some prediction market news from the outside, so forgive my basic question, but are prediction markets supposed to bring in money besides having new entrants bring in cash?
I've often seen prediction markets compared to stock markets, but the stock market is generally positive-sum because you're investing money in profitable businesses that pay dividends. In contrast, if a prediction market begins with 1000 people with $1000 each (and no one else joins or brings in more money), can it ever have more than $1,000,000 in the market?
If the answer is "no, it doesn't generate money", isn't that a big problem for prediction markets as a long-term concept? It means everyone will be fighting over a limited pie, and there will be no reason for the average person to join the prediction market (they just stand to lose their money to the experts). Is this a problem holding back prediction markets now, and are there ideas to fix it?
Thanks, I think I understand your concern well now.
I am generally positive about the potential of prediction markets if we will somehow resolve the legal problems (which seems unrealistic in the short term but realistic in the medium term).
Here is my perspective on "why should a normie who is somewhat risk-averse, don't enjoy wagering for its own sake, and doesn't care about the information externalities, engage with prediction markets"
First, let me try to tackle the question at face value:
Second, I am not sure it has to be a thing for the masses. In general, normies usually don't have much valuable information, so why would we want them to participate? Of course, it will attract professionals who will correct mispricings and make money but ordinary people losing money is a negative externality which can even outweigh the positive ones.
I consider myself at least a semi-professional market participant. I bet on Manifold and use Metaculus a lot for a few years. I used Polymarket before but don't do it anymore and resort to funny money ones despite they have problems (and of course can't make me money).
Why I am not using Polymarket anymore:
I do agree with your point, definitely "internalize the positive information externalities generated by them" is something which prediction markets should aspire to, an important (and interesting!) problem.
However, I don't believe it's essential for "making prediction markets sustainably large" unless we have a very different understanding of "sustainably large". I am confident that it would be possible to achieve 1% of the global gambling market which would be billions of revenue and a lot of utility. It even seems to be a modest goal, given that it's a serious instrument. But unfortunately, prediction markets are "basically regulated out of existence" :(
Sidenote on funny money market problems:
Metaculus's problem is that it's not a market at all. Perhaps it's a correct decision but makes it boring, less competitive and less accurate (there are many caveats here, probably making Metaculus a market right now would make it less accurate, but from the highest-level perspective markets are a better mechanism).
Manifold's problem is that serious markets draw serious people and unserious markets draw unserious people. As a result, serious markets are significantly more accurately priced which disincentivises competitive users to participate in them. That kinda defies the whole point. And also, perhaps even more importantly, users are not engaged enough (because they don't have money at stake) so winning at Manifold is mostly information arbitrage which is tedious and unfulfilling.