I've definitely come to change my mind on "prediction markets" this year... and if you've been reading some of my voluminous posts over the last 10-12 months, you've seen the transformation in real time: #1521591, #1520598, #1525792, #1524119, #1528883, #1530730, etc.

Here's my latest for The Daily Economy:

I had to argue with the editors a little bit over the specific use of insider trading (can't be seen to promote that, even though that is the logical endpoint of the argument).

Many years ago I came into the habit of offering (and taking) bets on absolutely everything. Conversationally, it could be anything from factual and statistical statements to principles or author names, often when I thought I knew something better than my conversation partner.
The point was not the money. It was what happened after losing a few bets: I learned that I often overestimated the things I so confidently knew. Sometimes, convictions held too strongly will cost me.

That's very Taleb (#1533284, #1540851), which I have also been on a binge of in recent weeks and months.

In an AI age of infinite generation but limited attention, the economic value of information also explains why I don’t find the proliferation of increasingly bizarre prediction markets quite as troubling as their critics do.

ECONOMICS is at its core about making predictions: felt uneasiness, forward-looking choices, work and sacrifice in the present in exchange for wellbeing and survival in the future.

Doing things, then, particularly as it pertains to commercial transactions, is the subject matter of the discipline. At high enough a level, it’s what financial markets do, too; investors buy securities in hopes of future cash flow. When they guess correctly and don’t overpay for the assets, they profit. When they’re wrong, the (short) seller benefits. Dynamically, asset prices are our collective, capital-backed, best guesses about the future state of the world.

"Prediction markets likewise leverage this money-tested, skin-in-the-game, best-guess model for the future."

The social value of a marketplace isn’t limited to the assets changing hands and the profits of (a few) participants. Prices transmit information, coordinate expectations, tell others whether to deploy more capital or less on a certain idea, whether to expand production or try something else. Prices tell people something about what other market participants know, believe, fear, or expect.

One trading party wins, another loses, but we understand that the system as a whole — asset prices, relocation of capital, a deep and liquid market for issuing securities — is positive sum for society. The spillover knowledge generated by a prediction market contract or an oil price option exploding in price has positive meaning for market actors everywhere. Information is valuable; knowing what it means, probabilistically speaking, for various states of the uncertain future is precisely what financial markets are here to do.

I really liked writing this piece... even though I spent waaaay too much time on it, initially incorporating a bunch of Taleb stuff, and struggling for a long time to find a reasonably coherent storyline. Anyway, now it's pretty good: I very much enjoy the spillover/positive externalities framework.

THANKS FOR YOUR CONTRIBUTING, SCHTACKERS!