[Link] Small-game fallacies: a Problem for Prediction Markets

Robin Hanson notes that the existence of a stock market can also give rise to an incentive to e.g. bomb a company's offices, yet such things very rarely actually happen.

the existence of the market also gives rise to parallel external incentives.

Yes, this is generally true, so what? A sports betting market, then, is necessarily a market for breaking players' legs, any country's stock and bond markets are markets in political assassination of its leaders, etc. etc.

Interesting point! It seems obvious in hindsight that if you reward people for making predictions that correspond to reality, they can benefit both by fitting their predictions to reality or fitting reality to their predictions. Certainly, it is an issue that come up even in real life in the context of sporting betting. That said, this particular spin on things hadn't occurred to me, so thanks for sharing!

"The best way to predict the future is to invent it." -- Alan Kay (and/or others.)

Seems a pretty straightforward extension of Goodhart's Law. Every measure is an incentive, with all the alignment and agency problems that come along with it.

I agree that simple, single stage game models do not usually predict important real world outcomes. I also agree that markets change players' incentives to act outside of that market.

However, society usually notices these blind spots and addresses them in one way or another. Szabo describes two real world problems:

1) Audits ignore outside accounts/trading activity

For public companies, deception of this kind is usually illegal. Key employees of a company certify on its annual report that “this report does not contain any untrue statement of a material fact or omit to state a material fact” or something to that effect. Also, insider trading can carry stiff penalties.

2) Prediction markets may become assassination markets

Murder is illegal. Also, profits obtained by illegal acts are subject to disgorgement in the United States.

…a prediction market on a certain person's death is also an assassination market. Which is why a pre-Gulf-War-II DARPA-sponsored experimental "prediction market" included a prop bet on Saddam Hussein's death, but excluded such trading on any other, more politically correct world leaders.

An “assassination market” on normal people exists today. It is called the life settlement market.

Microeconomics seems functional in macroeconomies.

I want to see if I understand: you saying that participants in prediction markets use microeconomic and macroeconomic tools. And, because microeconomic tools can overfit and macroeconomic tools are subject to the Lucas critique, prediction markets has kinks to work out?

while a prediction market does incentivize feeding accurate information into the system

Not quite. Prediction markets allow you to bet on your forecasts and their aggregate output is just capital-weighted opinion of the participants. They incentivize being honest about one's forecasts, but that's a very different thing from "feeding accurate information".