6 minute read
MONEY OVER MIND
Making—or losing— money in prediction markets can change beliefs. But how does that work?
by Mike Reddy Making
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“It’s hard for the human brain to think about the future, and we thought that using technology we can make it easier for us to transport ourselves to the future and imagine it better.” They picked the topic of climate change and recruited self-described believers and skeptics. The point was to see if participating in a climate-themed prediction market would shift beliefs because the market would serve as a non-partisan arbiter of truth.
Following the experiment, some did change their beliefs, but not merely because they participated. Participants shifted toward stronger concern about climate change proportional to the amount of money they won, regardless of whether they were believers or skeptics. “The nuance is that giving you a stock that’s contrary to your beliefs that constantly makes money does change your mind,” Cerf said. “When you constantly get feedback that your stocks that go against your beliefs are making money, you get feedback that says your beliefs are not aligned with reality and it would have been more financially rewarding for you to have the other beliefs.”
Then, gradually, you shift your beliefs without realizing it—even if your identity doesn’t change. Climate skeptics who began acting more like believers still identified as skeptics, Cerf said, “So I think the shift is not complete—it is in practice, but not in theory.”
The experiment was repeated focusing on sports instead of climate change, and the results suggested that fandom is not as closely tied to one’s identity as environmental beliefs. It’s easier to accept a favorite team losing a game than being wrong about ideological principles. But for prediction markets to change beliefs, Cerf said, participants must accept a common arbiter of truth. “It only works if when you lose, you accept that you lost, and if you win, you accept that you won,” he said. “And in this game, you entered knowing the rules, and you got an outcome that’s like going to trial. The jury says ‘yes’ or ‘no.’”
Prediction Markets
AUGUR was developed by Forecast Foundation as a global no-limit decentralized prediction market platform built on the ethereum blockchain.
BETFAIR, a London-based online gambling company, operates the world’s largest online betting exchange and hosts prediction markets on domestic and international politics.
KALSHI, a new federally regulated prediction market based in the United States, began its beta in July 2021 with markets based on COVID-19, climate, politics and pop culture.
NADEX (NORTH AMERICAN DERIVATIVES EXCHANGE), a regulated financial exchange, specializes in short-term binary options and spreads. It recently introduced a suite of prediction markets for forecasting economic events.
POLYMARKET, a prediction market platform built on the Polygon blockchain, uses USD Coin (USDC), a cryptocurrency stablecoin, to make trades.
PREDICTIT, a New Zealand-based prediction market, was launched as a research project in 2014 with a no-action letter from the Commodity Futures Trading Commission. It emphasizes politically themed markets.
BINARY OPTIONS: THE ORIGINAL PREDICTIVE MARKETS
Investors can derive valuable market forecasts from binary options. To learn more, Luckbox spoke with Travis McGhee, CEO of Nadex, a binary options exchange pending acquistion by crypto.com.
Tell us about Nadex’s new prediction markets. We’ve recently added approximately 11 new contracts on recognizable economic events, such as retail sales, crude oil inventories and the Consumer Price Index (CPI)—to name a few. We have plans to offer more, many of which will step outside standard economic event classification. What we have seen with more retail traders entering the financial markets is that there is increased demand for access to opportunity.
Ten years ago, opportunity came in the form of the S&P 500 or Apple stock. Now, traders across the globe are looking to speculate or hedge with events—both financial and non-financial—whose outcomes may directly or indirectly impact underlying financial markets.
What inspired you to launch these markets?
Funny enough, we’ve listed many of these markets at various points throughout our history. A lot of these new prediction markets are top-of-mind for world citizens and impact the global economy.
So, we thought finding the right markets to fit the current macroeconomic landscape made a lot of sense. With the recent pandemic, economic downturn and ongoing recovery, we have been busy adding many markets that are debated in the news and at the dinner table around the country.
What do traders need to know before participating in these markets? Each contract is effectively a yes-or-no (binary outcome) question. For example, “Will the next CPI release be greater than 0.9%?” Most prediction markets on Nadex have five strike prices—or price levels— to choose from.
If you think the next CPI release will be greater than 0.5%, you can trade that as well. Nadex contracts provide traders with extra options and flexibility in prediction markets. These contracts typically open and are available to trade about a week before the prediction numbers are released and the contracts expire. Once they open, people can trade these markets 23 hours a day, five days a week.
Are there any contract limitations?
While the possibilities for new prediction contracts are nearly endless, Nadex, as an exchange regulated by the Commodity Futures Trading Commission, is prohibited from offering some of them. Political elections would be one of those areas where we’re prohibited from listing markets. That said, we plan to expand our offerings in the coming months to include predictions around current issues relating to crypto, pop culture, travel, the pandemic and many other interesting topics.
What makes Nadex’s prediction markets different?
Beyond prediction markets, Nadex members can also speculate on stock indexes, commodities and currencies—all from the same account they use to participate in event contracts.
What trends will these markets be able to capture?
The insights gained from these markets may be the most exciting, but also the most over-looked aspect of their value. As these markets continue to grow in popularity with people from all walks of life, we can begin to get a statistically significant indicator of the real day-to-day experience of Americans and their views on the probability of future outcomes.
Additionally, because these are not just questions that may have been hastily answered on some survey but opinions and predictions backed by real money, they may arguably be a more accurate gauge of the current economic temperature.
What do you hope the future holds for Nadex’s prediction markets? We are continuously researching and evaluating opportunities to list contracts, both in the economic realm and outside, to continue offering our members the most innovative and interesting trading opportunities available anywhere.