Comments on: What is (and what good is) a combinatorial prediction market? http://blog.oddhead.com/2008/12/22/what-is-and-what-good-is-a-combinatorial-prediction-market/ Musings of a computer scientist and Yahoo on prediction markets, gambling, and estimating the odds of everything Thu, 11 Mar 2010 12:32:57 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: David Pennock http://blog.oddhead.com/2008/12/22/what-is-and-what-good-is-a-combinatorial-prediction-market/comment-page-1/#comment-374 David Pennock Wed, 01 Apr 2009 11:15:20 +0000 http://blog.oddhead.com/2008/12/22/what-is-and-what-good-is-a-combinatorial-prediction-market/#comment-374 Thanks Luke. Oh, to be more clear by "arbitrage attacks" at the end, I meant infinite loops where bidders can systematically take advantage of the market maker over and over, extracting arbitrary amounts of money. I agree that arbitrage in the usual sense is good for accuracy, but I believe at least for a prediction market it's much better for the auctioneer or market maker to handle all the mechanical "plug and chug" arbitrage and logical inference, forcing traders to focus on providing information, not searching for "free money". Thanks Luke. Oh, to be more clear by “arbitrage attacks” at the end, I meant infinite loops where bidders can systematically take advantage of the market maker over and over, extracting arbitrary amounts of money.

I agree that arbitrage in the usual sense is good for accuracy, but I believe at least for a prediction market it’s much better for the auctioneer or market maker to handle all the mechanical “plug and chug” arbitrage and logical inference, forcing traders to focus on providing information, not searching for “free money”.

]]> By: Luke H http://blog.oddhead.com/2008/12/22/what-is-and-what-good-is-a-combinatorial-prediction-market/comment-page-1/#comment-373 Luke H Thu, 26 Mar 2009 00:28:36 +0000 http://blog.oddhead.com/2008/12/22/what-is-and-what-good-is-a-combinatorial-prediction-market/#comment-373 Interesting you describe it as "arbitrage attacks" as something bad. Arbitrage on the bundled stocks will adjust the price to more accurate levels, ie, it will reduce the aggregate price of the stocks when they are more than 100%, and increase the aggregate stock prices when it is less than 99%. So arbitrage increases the accuracy of the prediction - what's bad about that? Interesting you describe it as “arbitrage attacks” as something bad.

Arbitrage on the bundled stocks will adjust the price to more accurate levels, ie, it will reduce the aggregate price of the stocks when they are more than 100%, and increase the aggregate stock prices when it is less than 99%. So arbitrage increases the accuracy of the prediction – what’s bad about that?

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