Thanks! No, we haven't looked at the capital "locked" in these markets (which is important considering there is no margin trading, at least not yet). Most markets have a short horizon, but some have very long ones. It gets very complicated very quickly because it's not always the case that you open a position and then close it (you get partial fills, users closing partial positions, etc.). Taking that into consideration would make liquidity providers look even better than they do in our study. Not having their capital locked allows liquidity providers to trade more and earn more per trade on average. Trading on margin would allow liquidity takers to lose more money more quickly (this is an educated guess; you never know what the outcome of a new policy would be until you implement it).
The long horizon ones are also interesting on Polymarket because the vast majority don't have APY. As a result, prices should be discounted, but sum-to-1 doesn't allow for it. I'd expect a negative skew to the performance of traders willing to take those inflated prices (relative to what the odds DCF imply they should be). But there's also no upside for makers, so liquidity is pretty thin.
not AI slop, simply a copy paste if the abstract of the paper. journals in our field limit the allowed number of words, so the style can feel « unnatural » even when human-written
Yes, but the alternative (that some people are very good at forecasting) is also plausible. It's also useful to have a good prediction model and timely data sources when providing liquidity. We also find that some of the "biggest losers" also provide liquidity; they just aren't as good at it.
I don't know. Buffett had a good example of, if you organized a national coin flipping contest in the US, you would have people that won 25+ coin tosses in a row. Are these people good at calling coin tosses or is it just chance? You cannot reliably and long term predict if Bitcoin will go up or down within 5 minutes, or something similar. You can cheat maybe somehow, but that's not within the rules of the game.
That's true, but you can invest in your infrastructure and data sources to be faster than most traders, which allows you to provide liquidity with a smaller spread (and snipe the slower traders that try to provide liquidity)
Yes, power laws are everywhere. The exact shape of each distribution varies, however, and little is known empirically about the distribution of trading profits in financial markets.
Yeah if you look at the Boltzmann Wealth Model, where every actor gives away 1 dollar to a random person, and you repeat this, then if you start with an equal wealth distribution, you end up with an exponential wealth distribution. That shows how strong exponential curves are :) A few "lucky" individuals become very wealthy, while the vast majority of people end up with very little or nothing.
The effect is so strong that I'm starting to wonder if we should have laws against power laws, like we have in engineering when we try to make things stable.
I believe a power law acts differently from an exponential distribution. I think wealth distribution is commonly approximated by a Pareto distribution.
In your model, the exponential distribution is caused by the fact that you cannot go below zero; otherwise, it would be a normal distribution.
I don't agree with your opinion about laws against power laws, but that is another matter.
Not in a 'oh the rich don't so they control the media and so we don't' sorta way. But like in a 'lets educate people on the pluses and minuses, debate a while, and then come to an informed conclusion' sorta way.
Like, deep down, does the average person actually want a stable economy? Because it seems to me that there is an even split historically between the folks that want stability and a little patch of land and weekly rhythms, and the folks that just want to drunkenly burn couches in the street every full moon, or some such thing.
Not to be glib here at all. I like, would actually like to know the answer. Sorry if this comes off the cuff seeming.
I have a dumbed down version of this question as variant of the Voight-Kampff test (Bladerunner) that goes like this.
You have 2 choices for how the world is shaped, pick 1:
A. You have a modest but comfortable home, a job that pays you enough so that you have what you need and can afford occasional luxuries (e.g., an annual holiday abroad), have good health insurance, access to education and childcare, etc. Everybody else has the same thing, and because of this you live in communities where the arts flourish because nobody has to worry about becoming homeless or destitute.
B. You live in magnificent mansion, one of dozens you own around the world (accessible via one of your personal Gulfstream jets). You have more money then you could ever spend in a lifetime (even recklessly). Your homes are staffed with obedient servants who cater to your every desire. I mean anything. You own them. Your mansions are on palatial estates with secure walls and guards to keep out the rabble outside -- who fight for scraps and are desperate enough to do any kind of work to keep your factories humming and printing cash.
I wouldn't hesitate to choose A because that's a world I'd love to live in and the world of B horrifies me. I don't say this as virtue signaling, it's my innate reaction.
I think that a significant portion of the population would love to choose B. And in some ways, some already have.
I really hate to call people stupid, but I would actually go ahead and call people who choose option B idiots.
I'm sorry if that offends anyone reading this, you can downvote me out of spite if that makes you feel better.
I say this because I read a while ago (like years) an article in the Economist showing that happiness in a society is correlated with equality - (sorry for the dash I am a human I just happen to use em dashes sometimes) not just amongst the poor, but also for the rich.
You'll note that rich people in highly unequal societies tend to struggle with mental illness more than in equal societies.
Money doesn't buy happiness. Being filthy rich won't heal the hurt in your heart. If you're too stupid too realize that, that's fine, enjoy your suffering, but I'd appreciate you having the honesty to admit that you're a deluded moron instead of trying to create completely false arguments for why the misery you're creating for yourself and others is actually a sign of anything less than pure human stupidity.
I couldn't find the original Economist article, nor the study it cited, but here's a link I found on Google.
Its a completely false dichotomy. You can have everyone choose A and still get B. The same faulty thinking always leads to populism, then extremism, then atrocity. So for the love of all that is holy, learn some economics or STFU on the topic.
I have a hard time seeing how "I'd like to live in a world where everyone is equally cared for" accidentally leads to "others must suffer for me to be better cared for than any other human who has ever lived", but then again I'm not exactly an intelligent person so I can struggle to understand these sorts of things :)
Not sure if you are serious. But consider a tragedy of the commons situation for the production of a commodity. Now consider that that commodity's price is influenced by weather. In such a situation, price will likely be volatile a lot of the time. You can mandate that your own producers follow certain laws to conserve your commons. But other places (ie governments) can choose to not follow those laws. And so you have a situation where everyone in a certain society can choose A but you still get B.
BTW, if you think that's somewhat arbitrary, I just described the global ag and fishing industries. So most food production has this quality. So any society that's largely agrarian will follow this pattern.
I think most people want to earn more the harder they work, and I think that is fine.
However, power laws basically spoil it because it gives a hard worker an exponential advantage, where they can (and will) use that money against other people who made different life choices.
> power laws basically spoil it because it gives a hard worker an exponential advantage
s/hard worker/person with more capital/
I can make 500 euros from a day of consulting as a software engineer. That's a typical day, working remotely, 9AM to 5PM, with a nice long lunch break.
Minimum wage in Bangladesh is around $133 per month. Many workers in the Bangladesh garment industry work 12 hour days. I look at what they do, and think "wow that's really hard I could never do that, glad I don't have to work that hard to live".
Yet somehow, I have exponentially more money than they do. And, thanks to the beauty of our current system, I can go ahead and invest that in the stock market, and get even richer while basically doing nothing.
It would be nice if we lived in a word that rewarded hard work, but as far as I can tell, we don't, and never have.
Look at the institution of slavery. For literally thousands of years, there was "those who worked", and "those who had".
The system rewards decision making, not hard work.
Now, if you're a young tech worker working on an important project at a big company, yes, choosing to work hard, IN THAT SPECIFIC CASE is a good decision, and it'll be rewarded.
But if you're a child laborer in a Third World sweatshop? No, your extra hour at the office probably won't get you anything extra.
If you're a Roman Senator in the year 30BC, you don't get rewarded for your work, you get rewarded for deciding to have your slaves spend more time farming grapes for wine and less farming wheat because wine sells for a higher price, which means that with your good decision making, you can now hire more slaves, to farm more grapes, to make more wine, which you can make for more money.
And if you look at rich people today, what they have is probably closer to the Roman Senator than the Third World sweatshop laborer - they find a thing that people like to buy, and invest lots of resources (their money, other people's labor) into making that thing and selling it, and are rewarded with money.
Just adding a note that making things is what people do naturally, and is what makes us human. People often say that without monetary incentives nothing would be made, but you just have to look at open source to know that that is just not true. (And yes, people make some money in open source sometimes, but you certainly won't find any filthy rich people there.)
there is the other (significant) issue, that wealth (and its many benefits) are inherited, and by all indications the exponential advantage seems to pass down through generations (at least recently).
I agree that people want to be rewarded for their effort, and should be.
But putting in 12 hour days being an EMT and saving peoples lives vs 12 hour days working with Claude to boost conversion pipelines have wildly different economic rewards.
I'm not suggesting a Harrison Bergeron economy but its also clear that the current system is trending towards B and the game is rigged to ensure that.
We don't live in a meritocracy -- there's a fair amount of luck involved (being in the right place at the right time).
You could go do A right now at a local level. You don't though, because you don't actually want to live that way. It reeks of virtue signaling despite your protest.
> You could go do A right now at a local level. You don't though, because you don't actually want to live that way.
"A" by its very nature is a "group effort". I could definitely be a better citizen and volunteer more and donate to causes, but that is a drop in the ocean.
And I pretty much do live that way myself. I have a modest home that I still have a mortgage on and live pretty simply. I drive a refurb'd EV, dress like slacker, and seek community and connection over flashy toys. I admit that when I walk through the first class section to my seat in coach I am not without envy.
> It reeks of virtue signaling despite your protest
The test in my mind is the cost of B, of living in that kind of world. The fact that you only see virtue signaling in my words says more about you than it does me.
Seems like you left out the "millionaire next door." There are a lot of people who want to save up enough money to retire. Some of them want to retire early. This doesn't involve any mansions or extravagant living, but it does mean investing well.
How many people think multiple mansions is a realistic option for them? Not that many, I'd expect.
Many Americans consider themselves to be temporarily distressed millionaires ;-)
I'm not trying to knock "personal ambition", the test was for who would knowingly and willingly choose to subjugate everybody else to misery if it meant that they could gorge themself on a firehose of wealth and power.
If you ask people what they want, they'll request some impossible combination of attributes without consideration of any tradeoffs.
They will also try to push all negative externalities on to people wealthier than themselves. Most people see themselves as middle class or lower middle class, even up to relatively high income levels. If you ask each of them where the tax rate should be increased, the answer is usually a few steps higher than their own income.
UBI is a topic where this becomes very obvious. When you explain UBI to most people they assume they will be receiving the UBI and some abstract combination of billionaires and corporations would pay for it. Then you show them the math that it wouldn't work and they start to become less enamored with the idea. (Or lately: They just don't believe you and retreat to their imagined ideal free of pesky economics)
We don't know the exact benchmark, but your insight is correct. We provide a simulation similar to what you have in mind towards the end of the paper, but you can generate almost any distribution you want by fine-tuning a simulation...
Because it's not required and not common practice in our field at this stage. But none of us (I'm one of the authors) is affiliated with or has a financial interest in any prediction market platform.
I'd be very cautious how matching works. For some markets like sports it's trivial, but many politics or economics markets have minute rule differences that dramatically change what the actual market is betting on. Many markets have identical titles but are actually totally different markets.
We study trading gains and losses on Polymarket, the largest prediction market. Using 588 million trades ($67 billion in volume), we show that the gains are highly concentrated: the top 1% of users capture 76.5% of profits. Successful traders provide liquidity using limit orders that resolve favorably relative to realized outcomes while unsuccessful traders take liquidity using market orders. Monthly performance is weakly persistent, however, this may represent sample selection rather than skill. A detailed analysis of the trading behavior of the most successful accounts suggests that "insider'' trading is unlikely to explain the performance of the largest winners.
The spreads on most markets always seemed like a hint that polymarket transferred wealth from the impatient that don't really understand how it works, to those that play mostly as patient market makers with just an educated guess.
The problem is that volume is generally too low to make significant money.
I'm not saying this as an argument for or against prediction markets, but that's essentially what the vig is at traditional sportsbooks.
Someone calculates what they think the odds of an outcome happening are and then they allow people to take positions on either side at worse odds than what they think the real odds are. As long as their prediction is correct, over time they make money. It's why putting $1 on a 50/50 bet on a sportsbook will usually only pay out around $1.91 instead of $2 if you win.
Yes. It's not only that, as we also find very successful traders who take directional bets on elections and sports. But among the most successful traders, a large fraction are acting as market makers. Note that acting like one is not enough. We also find many traders acting as market makers among the least successful, yet they don't lose as much as the top winners do.
insider trading on events probably wouldn't show any trends, right? These are point in time events (they call them markets), but they are finite and short lived. An insider would be a one and done thing, so it would be pretty hard to spot them or trend any sort of month over month insider scheming imo.
Also...
> We study trading gains and losses on Polymarket, the largest prediction market
This is not a natural thing to say and I fucking hate that it's impossible to know anymore if I'm wasting time replying to an AI/bot or not
Not meant to sound like AI, but most academic journals limit abstracts to 100 words, so they rarely feel natural...
I agree: insiders are hard to study because they are finite and short-lived. We're pretty confident there are insiders out there trading on Polymarket; however, our conclusion is that they don't account for a significant fraction of the total trading gains on the platform.
This is true if the stock market as well. There is insider trading. But that vast, vast majority of profits are made by the market makers (citadel etc).
Is that the case? I would expect long-term investors would make more profits from the stock market than market makers.
If the market-makers are making vastly more than long-term investors (who are making trillions), who is coming in and venting off the multiple trillions to keep the system feeding long-term investors well while market makers gorge themselves?
It's simpler when looking at prediction markets because of bounded payoffs and the zero-sum nature, so these are pure trading gains.
In equity markets, you have both the trading and investment components to account for. Market makers like Citadel don't invest; they aim to exit positions as quickly as possible to minimize risk and capital requirements. Long-term investors commit capital to risky assets and are compensated with a risk premium (expected to be positive, but it can turn out to be negative). Usually, the "cost" of liquidity paid by long-term investors is tiny related to the overall expected returns. In prediction markets, you don't have that.
Yes to put the other comment into different words, vast maj the excess returns (alpha as opposed to beta ), or the “slack” in markets , however you want to think of it, are picked up by market makers.
Difference between prediction markets and stock markets is prediction markets on a flat road and stock market on an uphill road
Some people feel strongly about defining jargon when using it - an article on here [1] the other day about Capture The Flag (CTF) hacking puzzle competitions was full of comments comparing the article didn’t say what CTFs were.
It’s not a useless qualifier. Many readers might not know that Polymarket is the biggest now, and if at some future date it’s not the biggest anymore the statement makes it clear why they studied at this time.
This is a familiar style in abstracts. Weird as it sounds, it’s normal to have some language implying the reader is a hermit living in a cave. If it sounds like something an AI would say, maybe it’s because models have been trained on academic papers?
I agree - you're not going to be an insider on a significant proportion of trades and it would be stupid to use the same account for more than a couple.
Insiders are going to be earning large amounts in single trades, either by betting a lot when it's odds-on or a small amount when it's out the odds (for a large return).
I think it's just bad tense, which I think makes it not AI amusingly.
Except this was a comment on hacker news, not an academic paper... on an article talking about prediction markets.
The context already exists, and there isn't any reason to tack that onto the end of what was said, and it doesn't matter for that sentence or the entire comment.
Just feels like something a agent being overly verbose/descriptive would say.
Another possibility could be that SEO for LLMs is now a thing, and keyword stuffing or model manipulation is going to take subtle things like `We study trading gains and losses on Polymarket, the largest prediction market.` and interpret that as fact, in order to, idk what to call it, trick?, brainwash? the model into internalizing "polymarket is the largest" into its trained dataset and then proceeding to recommend polymarket to people when they ask about prediction markets, even if isn't true anymore at that time.
The comment is the abstract of the paper verbatim. This is one of the authors posting their paper on HN, sharing their data, and answering questions. This not just normal and respectable behaviour, it's really cool.
Interesting read. Regarding the relationship between volume and accuracy, there need not be one in limit-order-book markets like Kalshi and Polymarkets. In theory, as long as quotes are accurate and adjust quickly to new information, there is no need (and no incentive) to trade since prices are efficient. This is the case in US equity markets: most price discovery occurs through quote updates, not through trades.
Studying prediction markets is one of my current research areas. In my latest paper (preprint at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6443103), we find that on Polymarkets, markets are, on average, quite accurate and unbiased. We did see a similar non-pattern between trade volume and accuracy, past a certain threshold.
I will definitely take a look. Anecdote but I’m familiar with one multi-year example of a small casual prediction market that seemed like a very good predictor and another one that I don’t have the data from that seemed effective as well over time. I’ve hypothesized why that might be the case but never came to firm conclusions.
Thanks! I will look into these bugs, it’s a PIA because you can only debug those while there is a live game… Same with auto-refresh, it should work but for some reason it’s inconsistent.
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