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Viliam comments on Open Thread Feb 16 - Feb 23, 2016 - Less Wrong Discussion
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Prediction Markets Going Wrong?
How many ways are there for a prediction market to go wrong?
In my story's current draft, once my protagonist upload has made a few copies of himself, I have him start up a prediction market to try to improve his decision-making, such as the likelihood any given plan will reach a useful goal. (Using currency created ab nihilo via a Bitcoin-like blockchain.) I have his similar copies end up coming to an overconfident consensus, leading to an explosive disaster, leading to attempts to deliberately diversity his copies' mindstates. Initially by simple psychological priming, later by more potentially dubious experimentation.
I only have an interested amateur's understanding of prediction markets, and have nearly no conception of the complications involved, such as what design choices are available when founding one or how many ways one can go wrong (other than the particular item in the previous paragraph). If there's anything you'd like to see in a story with a prediction market, or if you have any advice or references I can read up on, I'd appreciate your input.
(The idea I'm currently pondering: if it would be feasible to use a prediction market to generate answers to the question, "Which rights (or 'rights') should we include in our constitutional Bill of Rights, and which should we leave out?")
Prediction markets are driven by money. If someone has more money than the rest of prediction market together, they can burn the money to support a wrong prediction. Why would they do that? Presumably doing this brings them more benefit than the money spent. I can imagine two situations:
a) The prediction markets are new, only a few people bet there, so there is not so much money there. You may have a business that would be endangered by prediction markets becoming popular (e.g. people pay you for providing the expert opinion). Thus you spend money hoping to discredit the very concept of the prediction market.
b) People start trusting prediction markets blindly. For example, if the market predicts that X will become a president, people will not even bother to vote for the competitors, because "what's the point? they're going to lose anyway". In such case, X may be willing to burn a lot of money in order to convince people that he is going to become the president, because that will become a self-fulfilling prophecy, and his sponsors are willing to invest that money. For the sake of story, let's make it dramatic: the person intends to become a dictator, nationalize a lot of stuff, and give it to his sponsors; this is why the sponsors are willing to invest insane amounts of money, because they bet on getting much more in return.
By the way, "prediction market" being right in general doesn't mean that every answer will be correct. There may be answers where most people don't have a clue, and those will attract much less votes (but still some, because people are irrational).