# Manifold Markets

Manifold Markets is a prediction market platform where I've been
trading since September. This post will compare it to other prediction
markets that I've used.

### Play Money

The most important fact about Manifold is that traders bet mana, which
is for most purposes not real money. You can buy mana, and use mana to
donate real money to charity. That's not attractive enough for most of
us to treat it as anything other than play money.

Play money has the important advantage of not being subject to CFTC
regulation or gambling laws. That enables a good deal of innovation that
is stifled in real-money platforms that are open to US residents.

Play money misses out on an important advantage of large real-money
markets: traders who want to manipulate a price face arbitrarily large
costs to counter large investors (such as hedge funds) who notice the
manipulation. So I trust Manifold prices less than I trust those of the
best financial markets.

Actual real-money prediction markets are limited in size, and mostly too
small to attract hedge funds. So Manifold is [sometimes able to beat
real-money
markets](https://www.astralcodexten.com/p/mantic-monday-12924).

Manifold is structured so that manipulation seems rare. Competent
traders who have been active for a long time accumulate enough mana to
dominate newer traders. So prices are mostly set by traders who have a
significant track record of non-manipulative trading. That's not enough
to make Manifold prices a good input for decisions that affect billions
of dollars (how hard is it to bribe traders?), but it's good enough for
a wide variety of less important decisions.

### Liquidity

Another advantage of play money is that Manifold can create more mana
whenever they want.

Manifold has taken advantage of that to enable traders to, in effect,
buy on margin. In addition, they give daily handouts of mana to people
who trade daily. Those two features ensure that I mostly don't end up
in the situation that I got into on some other platforms of spending all
my money and then waiting for markets to be resolved. My more regular
trading on Manifold helps ensure that, at least for markets that get
some minimal amount of attention, there are enough regular traders to
keep the markets somewhat efficiently priced.

The most important way that Manifold provides liquidity is via an
automated market maker. The normal trading mode is that I accept
whatever price the system offers. Since Manifold uses play money, it
costs them nothing to subsidize the market maker, thereby ensuring that
markets have plenty of liquidity.

What's new about the market maker is that the amount of liquidity it
provides increases as trading increases. We expect that the first trade
on a market produces a less efficient price than the 100th trade. So we
want the first few trades to move the price fairly easily. Whereas the
hundredth trade is less likely to add new information about what the
price should be, so the 100th trade should move the price less than
would a similarly sized 2nd trade.

I
[advocated](https://bayesianinvestor.com/blog/index.php/2013/05/10/automated-market-makers-and-liquidity/)
this kind of approach a decade ago, then forgot about it. I'm glad to
see it being implemented well.

I traded for a few months before noticing a mention of limit orders. I
had vaguely wanted to enter limit orders, but didn't see anywhere to
enter them. (They're hiding under a button that says "%"). This
reflects a UI that looks simple to beginners, but has enough power to
maybe satisfy experienced traders.

### 50% Bias

Like many markets, prices on Manifold are too close to 50%.

E.g. as of January 30, [Will NASDAQ TMC (The Metals Company) hit 2$
before 1st Febuary
2024?](https://manifold.markets/ShadequesterShadequester/will-nasdaq-tmc-the-metals-company)
is trading at 10%. It has dropped about 55% in the past week, as the
number of remaining trading days dropped from 9 to 2. I think it would
ideally have dropped to something closer to 2/9 of last week's price.
That would require more people to trade it on a daily basis, in order to
overcome the price stickiness of the automated market maker. Attention
is spread too thinly for that to happen.

A longer term contract with a similar problem is [Will medicine master
head transplants in the next 10
years?](https://manifold.markets/AllisonDuettmann/will-medicine-master-head-transplan),
currently trading at 7%. Betting NO here looks like a nearly guaranteed
win, but it might be less than a 1% annual return on my initial
investment (I need to put down 93 mana per 100 shares). That's not an
impressive return compared to what I expect on shorter term contracts
such as the one I mentioned above.

Why was the head transplant contract ever above 7%? It looks like the
automated market maker is always initialized to 50%. One alternative
that I've seen (in the original Good Judgment Project?) is to have that
initial price set by an auction of traders, with the automated market
maker only becoming active after the first trade. That makes the initial
price more accurate. The downside is that there is much less incentive
for anyone to make the first trade, so some (possibly many?) contracts
won't start trading, and maybe traders will generally put less effort
into searching for new contracts.

I selected these two examples because they showed the problem most
clearly of markets I've been following recently. That's partly because
they've hardly attracted any attention. Heavily traded markets show
milder versions of this bias.

### Addictiveness

Trading on Manifold is mildly addictive. Factors that contribute to this
are:

-   Having a potentially daily source of new mana.
-   Having that mana supply depend on daily trading.
-   Having prices that are inefficient enough that I can make frequent
    profits.
-   Having a conspicuous and readable game-like score.
-   Having a wide variety of markets, with an adequate UI for finding
    new markets that interest me.

### Amateurs Resolving Markets

Most serious platforms try to ensure that all markets are resolved in
accordance with an unambiguous interpretation of the wording of the
contract. This usually involves someone who works for the platform
acting like a lawyer when each market is first proposed, to rule out any
important ambiguity in the wording. That person also acts as a judge
when each market is due to be resolved. The overhead associated with
this work likely limits the quantity of markets that can be created,
while still leaving traders dissatisfied with some market resolutions.

Manifold rejects that approach: any user can create new markets, and
resolve them when they come due, with approximately no requirement that
market will be resolved fairly. The burden is on traders to check that
market resolution criteria are clear, and that the creator is reputable
enough to judge it fairly.

This policy generates [some
complaints](https://www.lesswrong.com/posts/DpDnXHcPejd9tn8R5/ambiguity-in-prediction-market-resolution-is-harmful).
As a trader, I don't feel like I'm affected much by this choice. Other
prediction market platforms never managed to handle this well enough
that I was more eager to trade there due to a greater expectation of
fairness.

One of my earliest memories of a prediction market is the Iowa
Electronic Markets, where I lost all my investment ($500?) by betting
that Bush would win the 2000 election. I apparently failed to read the
fine print that said the market would be resolved based on who won the
popular vote.

The difference between play money and real money makes me less worried
about similar mistakes on Manifold.

The existence of a wide variety of markets on Manifold enables me to
diversify more than I did on other platforms, which also reduces my
concern over individual markets being resolved unfairly.

### Concluding Thoughts

Manifold's approach of encouraging lots of markets with little thought
about quality is working better than I expected it to work.

Manifold seems somewhat likely to become a respected source of
predictions for a moderately important set of questions.

However, they don't seem to be close to being profitable. My intuition
says they'll find a way to earn enough to sustain some sort of growth.
I don't expect them to do well enough that I'll regret not investing
in them.