Arbitrage of prediction markets

Pure arbitrage pretty much never exists. There is almost always non-zero risk of loss. Arbitrage transactions invariably have some execution risk, though with very liquid markets and electronic trading it may be arbitrarily small. Generally the liquid markets with the fastest trading are those that will offer the least arbitrage opportunities though so in reality greater profits almost always come at the cost of increased execution risk. It doesn't seem a huge stretch to extend the concept to statistical arbitrage - you're never really going from zero risk to risk, you're just increasing from a very small risk to a larger risk and going from very reliable price correlations to less reliable ones.

There is value in clarifying which definition is being used. That is, I hope, what I've been doing here, in opposition to the notion that there is only one sense that can be used and so any clarification is nonsense.

And while strong arbitrage is nice in having 0 risk as opposed 0.1 risk or 0.11 risk, we experience no trouble in real life because some words can be made to overlap despite their average & typical uses. Expected profits or edges don't necessarily cover the same mental ground; if I buy and hold indexes for 50 years, I might expect a profit, but few would call that arbitrage.

"The sense of a sentence - one would like to say - may, of course, leave this or that open, but the sentence must nevertheless have a definite sense. An indefinite sense - that would really not be a sense at all. - This is like: An indefinite boundary is not really a boundary at all. Here one thinks perhaps: if I say 'I have locked the man up fast in the room - there is only one door left open' - then I simply haven't locked him in at all; his being locked in is a sham. One would be inclined to say here: 'You haven't done anything at all'. An enclosure with a hole in it is as good as none. - But is that true?"

--Wittgenstein, Philosophical Investigations, 99

I mean, would you say that the AGI I'm building in my basement is "Friendly" just because I expect it to do good things, even though it also might paperclip the universe 2% of the time?

If that is a once off 2% chance of failure then I'll go with it and call it Friendly Enough For Me. Come to think of it I may be tempted by 2% per 1,000 years.

The problem is, what do you mean by the Wiktionary entry is clearly wrong? They seem pretty reasonable to this layman. Do you mean that they do not exclude every meaning including the possibility of loss? By what authority is this open-mindedness 'wrong'? Did Jehovah in some obscure Numbers passage lay down this rule? Or is it just that you always use 'arbitrage' in the no-possible-loss sense, and so it's incorrect for anyone else to use it any other way?

I hold to a descriptivist view of language; the use of a language is its meaning. If people use arbitrage in senses which allow loss, then arbitrage can mean techniques which allow loss. (Such techniques are a superset of techniques which don't allow loss, so it's fair to call the narrower no-loss definitions 'strong' definitions, along the lines of the Strong and Weak AI hypotheses, for example.) At that point, all I need to do is show that the other meanings are widespread. Wikipedia has it, and serves it up to ~1,600 viewers a day; Wiktionary probably adds a few hundred hits to that. The Google Books has hits that explicitly point out that they will henceforth use 'arbitrage' in its narrow sense; other books simply define it in a broad sense. The News hits demonstrate that the wider meanings are likewise in widespread use. (Your Google search has no relevance, any more than if I had instead said 'bgrah449 is using the narrow definition of abitrage', which ironically actually has a non-LW hit.)

But what was described, in the article and in the comment, is entirely the wrong use of the word "arbitrage."

I would disagree here. The article, perhaps, but the comment to which I was responding was clearly using the broader definitions: http://lesswrong.com/lw/1ia/arbitrage_of_prediction_markets/1b12

Long-Term Capital Management, from the popular history books I've read on them (and 1 or 2 academic articles long ago), did not believe it was an overall arbitrage. Arbitrages in the risk-free sense were taken when they found them, but much of their business was looking for mismatches which were not risk-free, but which they could exploit with leverage and hedge themselves against. They figured that they could only be killed by century-events or rarer. If they were just risk-free arbitraging, then they could never have been killed; if you can have losses on a risk-free arbitrage, an arbitrage in the narrow sense, then it's not such an arbitrage, by definition.

Thus, bringing up the strategy of diversification, and LTCM in particular, only makes sense if mattnewport was thinking of arbitrage in the broader sense. (How can 100 risk-free arbitrages across the global economy be any safer than 100 risk-free arbitrages in just the USA? 100 0 = 100 0.) This was my original point: you and Blueberry both seemed (to me) to be discussing narrow/strong arbitrages, and mattnewport was putting forth a broad/weak arbitrage.

So I can't help but conclude that your "a word can have many meanings" idea is just an applause light.

Ironically, 'applause light' can itself be an applause light.

For the benefit of the conversation, and posted without taking a position, here is the OED's definition of arbitrage:

Comm. The traffic in Bills of Exchange drawn on sundry places, and bought or sold in sight of the daily quotations of rates in the several markets, each operation being based in theory on the calculation known as ARBITRATION of Exchange, q.v. Also, the similar traffic in Stocks, so as to take advantage of the difference of price at which the same stock may be quoted at the same time in the exchange markets of distant places. [In this sense adopted from mod.F., and usually pronounced ({sm}{fata}{lm}bitr{fata}{lm}{zh}).]

Here is the OED's definition of Arbitration of Exchange:

Arbitration of Exchange (cf. F. arbitrage in same sense): The determination of the rate of exchange to be obtained between two countries or currencies, when the operation is conducted through a third or several intermediate ones, in order to ascertain the most advantageous method of drawing or remitting bills.

ETA: One needs a subscription to follow those links.