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AspiringRationalist comments on Irrationality Game II - Less Wrong Discussion
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Irrationality Game
Prediction markets are a terrible way of aggregating probability estimates. They only enjoy the popularity they do because of a lack of competition, and because they're cheaper to set up due to the built-in incentive to participate. They do slightly worse than simply averaging a bunch of estimates, and would be blown out of the water by even a naive histocratic algorithm (weighted average based on past predictor performance using Bayes). The performance problems of prediction markets are not just due to liquidity issues, but would inevitably crop up in any prediction market system due to bubbles, panics, hedging, manipulation, and either overly simple or dangerously complex derivatives. 90%
Hanson and his followers are irrationally attached to prediction markets because they flatter libertarian sensibilities. 60%
Down-voted for semi-agreement.
There are simply too many irrational people with money, and as soon as it became popular to participate in prediction markets, the way it currently is to participate in the stock market, they will add huge amounts of noise.
The conventional reply is that noise traders improve markets by making rational prediction more profitable. This is almost certainly true for short-term noise, and my guess is that it's false for long-term noise, i.e., if prices revert in a day, noise traders improve a market, if prices take ten years to revert, the rational money seeks shorter-term gains. Prediction markets may be expected to do better because they have a definite, known date on which the dumb money loses - you can stay solvent longer than the market stays irrational.