Betting on the future via prediction markets, with Stephen Grugett of Manifold
Complex Systems with Patrick McKenzie (patio11)
00:00
Capital Efficiency in Prediction Markets
In prediction markets, the cost and efficiency of capital allocation heavily influence trading behavior, particularly at the extremes of probability. When a market trades near certain outcomes, significant capital is required to push prices higher, creating a disproportionate bias compared to the minimal capital needed for lower probability bets. This discrepancy leads to markets that appear inefficient, as high probabilities may not reflect true likelihoods and low probabilities can falsely overshoot zero. The removal of loans has exacerbated this issue, as traders are left with limited capacity to adjust prices based on actual risk, resulting in the convergence of trading prices to a risk-free rate rather than their true probabilities.
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