Who wins and who loses in prediction markets? Evidence from Polymarket (opens in new tab)

The spreads on most markets always seemed like a hint that polymarket transferred wealth from the impatient that don't really understand how it works, to those that play mostly as patient market makers with just an educated guess.

The problem is that volume is generally too low to make significant money.

That sounds as though the successful traders are informally acting as market makers and are rewarded for doing that.

insider trading on events probably wouldn't show any trends, right? These are point in time events (they call them markets), but they are finite and short lived. An insider would be a one and done thing, so it would be pretty hard to spot them or trend any sort of month over month insider scheming imo.

Also...

> We study trading gains and losses on Polymarket, the largest prediction market

This is not a natural thing to say and I fucking hate that it's impossible to know anymore if I'm wasting time replying to an AI/bot or not

> Sports betting apps ban users who are too successful. Polymarket doesn’t.

Polymarket is set up as a market between users. Someone has to be on the other side of the trade.

With betting apps, the house is on the other side of the trade. If you're too good they choose not to trade with you.

The alternative for the betting apps is to give worse payouts to everyone to cover for the wins of the long-tail experts. This would degrade the experience for the average bettor on the platform. Maybe that would be a good thing because it would discourage them from playing, but I digress.

The most money can be made in markets which have the worst correlation between reality and the market price. There are types of markets on PM which are very far from reality. There are types of markets which are very close to reality. It isn't surprising that sports markets are in the first category.

There are also political markets, where it is clear campaigns manipulate the prices for the same reasons they will publish polls showing they are gaining or ahead. The CA governor market is especially far from reality. This is compounded by the fact that Americans can't trade this market so the distance from reality is especially bad for American election markets.

That being said, that most people don't make money on PM isn't surprising. The same thing is true for most markets. You only invest (business) time into something if you are getting a return. So those that are actually good at making predictions put the time into making trades, so they are the bulk of the trades and the bulk of the profit. Same thing happens with day traders on the equity markets.

I have absolutely zero knowledge about the area, but doesn't Polymarket just set up bets between users?

If you're a regular bookmaker, who is on the hook for any losses, then yes you would ban successful users. But in this case you just skim off a fee for each "trade" so there's no incentive to ban anyone.

It doesn't seem surprising that being a bookmaker in your behavior on sports is a big win since many people bet on identity instead of information in sports and with small bets/attention. It's interesting in that the pattern could have turned out to apply immediately across everything or something.

I always wondered if you could compare odds on the most advanced sports betting apps and those on futures markets and exploit any big diffs between the two.

$1000 would return $1010. The money comes from people who want to close their trades early rather than wait for the market to settle. Often times no one actually takes these offers and then it just sits in the order book.

Yes, power laws are everywhere. The exact shape of each distribution varies, however, and little is known empirically about the distribution of trading profits in financial markets.

these apps should load with this pie chart showing your likelihood of ever making a profit based on what they know about you. "YOU WILL LOSE MONEY ON THIS APP". Like the cigarette packs.

Thanks! No, we haven't looked at the capital "locked" in these markets (which is important considering there is no margin trading, at least not yet). Most markets have a short horizon, but some have very long ones. It gets very complicated very quickly because it's not always the case that you open a position and then close it (you get partial fills, users closing partial positions, etc.). Taking that into consideration would make liquidity providers look even better than they do in our study. Not having their capital locked allows liquidity providers to trade more and earn more per trade on average. Trading on margin would allow liquidity takers to lose more money more quickly (this is an educated guess; you never know what the outcome of a new policy would be until you implement it).

We don't know the exact benchmark, but your insight is correct. We provide a simulation similar to what you have in mind towards the end of the paper, but you can generate almost any distribution you want by fine-tuning a simulation...

To relate it to a more-general economic article that has stuck with me for a while:

> If you simulate this economy, a variant of the yard sale model, you will get a remarkable result: after a large number of transactions, one agent ends up as an “oligarch” holding practically all the wealth of the economy, and the other 999 end up with virtually nothing.

https://www.scientificamerican.com/article/is-inequality-ine...

Because it's not required and not common practice in our field at this stage. But none of us (I'm one of the authors) is affiliated with or has a financial interest in any prediction market platform.

The rules for each contract are provided when you bet, but ultimately there are plenty of markets that are settled in controversial ways and users have little recourse because the sites TOS's often say their rulings are final (this is the same for many sports books as well).

To give an example, I wagered on a market a while ago that Trump would say "Mamdani" before the end of the week. He responded to a question Mamdani where the reporter asked about the mayor by name and Trump said "Mandami" instead of "Mamdani" (switched the m and n). Kalshi ruled that that didn't count as Trump having said the word.

Trump ultimately said Mamdani correctly the next day so it ended up not mattering and I think the rules have since been updated to accept obvious mispronunciations, but I think it's a good example of how much gray area some of these markets can have.

There’s a lot of talk about corruption in UMA but I think it is oversold as a problem. UMA is just a scapegoat for Polymarket’s desired outcome.

Polymarket implemented the “independent” truth process with UMS following regulatory scrutiny but they still decide the outcome.

https://reticulating.substack.com/p/polymarket-isnt-a-predic...

Could you please not post generated comments to HN? It's not allowed here. See https://news.ycombinator.com/newsguidelines.html#generated and https://news.ycombinator.com/item?id=47340079. We ban accounts that do this and I don't want to ban you, so please write everything that you post to HN by hand.

Of course, it's impossible to know for sure what was LLM processed or not, but we're getting complaints about some of your posts and, upon inspection, the complaints seem justified.

We have a grad student working on matching markets across venues. Not a trivial task at scale, but we hope to look at that eventually.

I don't think that's surprising because the alternative would be that some people are able to predict the future. Whatever strategy one might figure out that works is long term destined to fail, as other people start using them. The only real way to make money there is by providing liquidity since it's a zero sum game. For the stock market this is not true because it's not zero sum, it grows over time.

I couldn't make heads or tails of that prose.

There's probably also some hedging going on across accounts that look like directional bets.

I don't know why cross venue arbitrage would be unskilled? There's a lot of it for the taking and I, and others, do so.

this comment was clearly written by AI. please don't do that.