# Prediction Markets Are About Being Right

Response To (Marginal Revolution): [If you love prediction markets you should love the art world.](https://marginalrevolution.com/marginalrevolution/2018/12/love-prediction-markets-love-art-world.html)

Previously on prediction markets: [Prediction Markets: When Do They Work?](https://thezvi.wordpress.com/2018/07/26/prediction-markets-when-do-they-work/), [Subsidizing Prediction Markets](https://thezvi.wordpress.com/2018/08/17/subsidizing-prediction-markets/)

I’ll quote the original in full, as it is short, and I found it interestingly and importantly wrong. By asking the question of _why _this perspective is wrong, we see what is so special about prediction markets versus other markets.

> Think of art markets, and art collecting, as an ongoing debate over what is beautiful and also what is culturally important.  But unlike most debates, you have a very direct chance to “put your money where your mouth is,” namely by buying art (it is very difficult to sell art short, however).  In this regard, debates over artistic value may be among the most efficient debates in the world.  At least if you are persuaded by the basic virtues of prediction markets.  The prices of various art works really do aggregate information about their perceived values.
> 
> I have, however, noted a correlation, how necessary or contingent I am not sure.  The “white male nerd types” who are enamored of prediction markets tend to be especially skeptical of the market judgments of particular art works, most of all for conceptual and contemporary art.
> 
> In my view, discussions about the value of art, as they occur in the off-the-record, proprietary sphere, are indeed of high value and they deserve to be studied more closely.  Imagine a bunch of people competing to make “objects that are interesting but not interesting for reasons related to their practical value.”  And then we debate who has succeeded, or not.  And those debates reflect many broader social, political, and economic issues.  And it is all done with very real money on the line.  The money concerns not just the value of individual art works, but also the prestige and social capital value that arises from having assembled a prestigious and insightful collection.

That’s _exactly_ why (almost) everyone who loves prediction markets hates the high-end, expensive art markets, even if they love art and artists and buy original paintings to hang on their walls. This goes beyond ‘skepticism of the market judgments.’ Expensive art markets are not fundamentally markets. They are fundamentally a political status game.

Consider three (non-exhaustive) types of markets: Consumption markets, commercial markets and prediction markets.

Consumption markets are where the buyer is buying the item in order to use it.

The buyer who pays more than necessary is sad in one sense, and the one who got the best deal is happy in that sense. But that sense isn’t the important one for the buyer. If you are ‘right’ it is because you indeed got good use of the item that justified the purchase. If you are ‘wrong’ it is because you didn’t.

Thus, we can point to a ‘naive’ participant who doesn’t ‘play the game’ of that market, and say ‘look how much they could have saved’, or did ‘save’, but that doesn’t actually impact them.

Liquid commercial markets are where the buyer plans to sell the item to someone else.

Middle men, arbitrage, investment, greater fools, that sort of thing. Buy low, sell high.

If you buy a stock, or a commodity piece of art, or inventory for your store, or a cryptocurrency, and others want to buy it for more, it goes up in price and you make money. If they want to sell it for less, it goes down in price and you lose money.

The buyer who pays more than necessary is sad, and loses money, in the only sense that matters. If the price goes down, that too makes the buyer sad. Paying a locally good price, or having the price go up, makes the buyer happy. The key is to buy before others buy, so they drive the price up.

You might reply, no, the bigger key is to buy what is cheap and sell what is expensive, based on fundamentals, and that will bear out over time.

Well, maybe.

Yes, often buyers and sellers are driven by fundamentals. But in an important sense, that is a coincidence. What is actually good news is often considered bad news, and vice versa. Prices are often largely driven by who is thinking about what and the emotional state and financial needs of participants. The market can stay insane longer than you can stay solvent. The people who say such non-fundamental movements are random, are mostly saying they aren’t good enough to understand and predict them in this case.

Yes, _eventually _fundamentals _might_ take over.  Or they might not. Low prices cause damage or make items impossible to justify storing or stocking. High prices trigger media attention and create opportunity. Low prices trigger margin calls, gets the company bought out or its employees and partners to quit. High prices trigger short squeezes and make everyone want to work with and for you. And so on. Momentum trading _works, _damn it (like everything else on this blog, not investment advice!).

Ideally the commercial market is anchored by connection to a consumption market – someone wants the goods, or is willing to collect the profits from the stock, or what not. The stronger that anchor versus speculative factors, the more accurate the prices.

Prediction markets have elements of both.

Prediction market traders can choose to mostly act like traders. If you think that others will think that the Patriots will win next week, you can bet on the Patriots now and then bet against them later when the odds change, and make money. You can be a market maker, or a block trader, or any other traditional market role.

In doing this, a trader cares about _future social reality. _They are people predicting what others will, in the future, predict that others will predict that others will predict, and so on. World events can help or hurt them, as they change perception, but they care about that perception and not the reality. By the time reality sets in, who knows what positions the trader will have?

In prediction markets there is another option. You can care about _future reality._ The market predicts a future outcome, and importantly _you can stay solvent longer than the market can stay insane. _Either the Patriots will win next week, or they will not. You can do better by using your commercial market tactics to grab the best possible price on the Patriots winning or losing, but the important thing is that _you win if you are right about the concrete thing, and you lose if you are wrong. _

This works because there is an _objective outcome, _and it occurs _quickly. _Thus it functions in its own way like a consumption market.

_Truth matters. _

If you choose, _only truth matters. __I don’t have to care what other people think. They don’t determine if I win or lose._

That’s what I love, more than anything, about prediction markets. That’s the reason behind [many of the requirements of well-functioning prediction markets](https://thezvi.wordpress.com/2018/07/26/prediction-markets-when-do-they-work/): They enable this sole reliance on truth, without imposing virtual taxes via long lock-up periods. This also enables prediction markets to output accurate predictions.

That’s also a lot of what I love about trading. With a sufficiently deep and liquid market, _you win if and only if you are right._ No one gets to take that away from you and decide who gets the credit and the money. Only your skill mattered, and you reap what you deserve.

I _strongly encourage _the type of people who read this blog to strive to identify and work in such realms. _Be where being right, rather than being approved of, is rewarded. _

The world mostly does not work like this.

The world mostly _hates _prediction markets, _because they predict concrete consequences and outcomes accurately without taking into account what those in power, with high social status, want to be the prediction. _

Mostly, winners and losers are determined by social processes, status, coalitions, power, money and so on.

Credit and compensation mostly isn’t based on who knew the truth and predicted accurately, or who did the work or created the value, or even what was stated in the contract. It is based on who has power and what they decide, based on what is good for them. History, along with everything else, gets decided by the winners.

That’s life.

That’s also expensive art, and expensive art markets, of the type Tyler speaks of. Only more so.

As I understand it (from, mostly, following Marginal Revolution links and posts) a small group determines who succeeds and fails, and buys art from each other, and manipulates the social reality of the art world and its prices to suit its fancies. Its fancies are mostly about the pursuit of conspicuous consumption, high social status and its associated rewards, wealth storage, money laundering and tax evasion, plus suckering outsiders and scamming them out of their money. Artistic merit, or aesthetics, are mostly a minor consideration.

Recall Tyler’s description:

> Imagine a bunch of people competing to make “objects that are interesting but not interesting for reasons related to their practical value.”  And then we debate who has succeeded, or not.  And those debates reflect many broader social, political, and economic issues.  And it is all done with very real money on the line.  The money concerns not just the value of individual art works, but also the prestige and social capital value that arises from having assembled a prestigious and insightful collection.

In this context, what does it mean for an object to ‘be interesting’? It means having a high price, but mostly it means being judged as interesting by a high social status cabal that is primarily designed as an alliance of the high status connected people against everyone else. This need not be explicit at all – it is how such people instinctively operate, and you either learn those instincts or you never make it into the club.

There is no reason think any of this will ever “return to fundamentals” in any sense. The system sustains itself. There is (almost) no there, there. There never will be.

Thus, if I buy art, and people don’t like me, they will find ways to charge me a lot more then they’d have charged an insider, and then they say therefore my art is not so valuable. Because I was buying it, and now I own it.

If I _hadn’t _bought that piece, would it have become valuable? We’ll never know. Was it valuable before I bought it? Also impossible to say.

That game is rigged, man. The only way to win is not to play.

If I think those people are wrong, I can _consume _the art by displaying it in my house and admiring it. If I want to spend a few hundred or thousand dollars on something I love, by all means I should go for it, but have zero illusions about the work becoming ‘valuable.’

What I cannot do is _predict _that they are wrong, and wait for events to prove me right. There is no judgment day. No profit stream. No right. No wrong.

There are only cliques who watch each other to see if they are favoring the others in the clique, and use this to exploit others, because that’s what winners and clique members with power and money do. It’s sort of a market, like everything else. But in important senses, it is badly named, and something people like me despise. It is our failure mode and our doom, the way that prediction markets are our success mode and our hope.

Thus, if you love art markets you likely despise prediction markets, at least outside of their designated safe areas like sports and elections. And if you love prediction markets, you likely despise art markets whether or not you find them informative and fascinating in their own way.

What _none _of the people, whether they love or hate either market type, should be fooled by, is in accepting in a non-skeptical fashion the ‘market prices’ of ‘art’ in the art market. That is flat out not what is going on, at all. Such trades are not about the exchange of cash value for art value. Trying to use them to value the artwork misses the point entirely.

Are these art-market games worth understanding for what they can teach us about the world and how people work? Absolutely. Such shadowy practices do not get the light shined on them, that they deserve. Scams and exploitation and manipulation should be exposed. Political games as well. To blame and ideally punish those responsible, to protect people against them _and against having to play such games to succeed. _But more than that, to educate us about _how people, and how such systems, work. _Mostly, those who do understand how such things work only understand them from the inside, and do so in a non-intellectual fashion. With exposure, and as they see such actions succeed, they adopt their actions, views, instincts and very identity towards perpetuating such systems through imitation, usually without ever understanding what is going on in either themselves or the system at large.

Actually understanding how such things work might be the first step towards containing or overcoming such systems, or at least minimizing the damage they inflict on our lives, our status, our wealth and our souls.

It is also possible that such systems are in fact how anything actually gets done at all, and the exposure of more and more hypocritical and exploitative systems is making society unable to function, which would be far worse.

That’s a risk I am willing to take.