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Noah Kreutter's avatar

This doesn't work as well as you think - financial markets tend to break when participants are optimizing for the probability of finishing in the top N, especially when N is small. If I were trying to maximize my probability of winning this tournament in a blended pool of rational and irrational agents, I would be:

1) taking way more risk than I would if my goal were simply to maximize my portfolio's returns

2) taking risks that give me different risk exposures from other participants, even if the arithmetic expectation isn't in my favor.

For example, if the true probability of an event happening is 90%, and various market participants bid it up from 50% to 88%, well, I am probably more likely to sell it than buy it at those prices. The intuition is that if the event resolves YES, I will have bought it at the worst price among all the people who bought YES, but if the event resolves NO then I will have sold it at the best price among the people who sold YES.

Requiring people to trade a variety of markets also doesn't do much - it's pretty easy for people to buy YES at 99% on a variety of already-basically-resolved markets to meet this requirement, especially when those markets will formally resolve quickly.

All in all I expect that this competition tests the skill of "how good are you at gaming formal systems" a lot more than it tests the skill of "how good are you at making well calibrated predictions about the world".

Source: I was a quantitative trader for 2 years and they made us play a bunch of games market trading games with solutions like these during training.

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MrLittleTexas's avatar

I dislike the $50 on 20 markets constraint. It doesn't really solve what you are trying to solve anyway. Someone could just get lucky on a single market that resolves early - lets say there is a fatality between Taiwan and China tomorrow, and someone gets a 10x return on it. They can then just spread $50 around to 19 other markets without really thinking about it, and they will still be up big regardless of how those 19 turn out.

Meanwhile if you spend your energies trying to spread the money around on different markets early, you may be right in your probability assessments on many of them, but will get very limited return on each, since only putting $50 apiece.

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