Your Enemies Can Use Your Prediction Markets Against You

Mars' investment subsidizes a coup because entrepreneurial space pirates can become Mars' counterparty and use their expected profits to fund the conquest of Ceres.

Ok, so what happened is Mars bet 5 million dodgecoin there would not be a coup.  So if there is a coup, those who bet for a coup gain 5 million dodgecoin?  Just trying to understand this nested statement.  So now the space pirates have a speculative venture : conquer Ceres.  How do they get investors to fund their expedition and pay for all the robotic marines and munitions and ships they need?  Is there a blockchain solution to lending for this?

For that matter, don't the space pirates have to have 5 million dodgecoin in liquidity to make the bet for the expedition and also another 5 million to pay for it?  It seems like this situation just offers a chance for them to get paid but not actually pay the 'cash' they need to buy weapons off the black market.

I wonder if this is a direct example of Goodheart's Law.  When a measure (prediction) is used as a control (to make decisions on), it ceases to be a good measure.

Are there formal models of the behavior of prediction markets like this? Some questions that such a theory might answer:

• Is there an equivalence between, say, "I am a bettor with no stakes in the matter, and believe there is a 10% chance of a coup", and "I am the Mars government and my utility function prefers 'coup' to 'not-coup' at 10-to-1"? In both cases, it seems relevant that the agent only has a finite money supply: if the bettor only has $1, the profit they can make and the amount they can move the market is limited, and if Mars "only" stands to gain $5 million from the coup then they're not willing to lose more than $5 million in the market to make it happen.
• In a group of pure bettors, what's the relationship between their beliefs, their money supply, and at what price the market will stabilize? I'm assuming you'd model the bettors as obeying the Kelly criterion here. If bettors can learn from how other bettors bet, what are the incentives for betting early vs. late? I imagine this has been extensively studied in economics?
• If you want to subsidize a market, are there results relating how much you need to subsidize to elicit a certain amount of betting, given other assumptions?

If Mars values a coup at 5M, and Earth values a coup at -5M, Earth can buy contracts to win 5M if there is a coup, Mars can buy contracts to win 5M if there isn't a coup, and they can both cancel their clandestine programs on Ceres, making the interaction positive-sum.

...Not sure that actually works, but it's an interesting thought.

What if Earth's prediction market only allows Earth's government to buy the "pays out if coups happen" shares, and only allows the counterparties to buy the "pays out if coups don't happen" shares? Couldn't this eliminate the space pirate problem?

Mars buys shares that pay out 5 million Dogecoin if there is not a coup

Suppose the prior implied probability of a regime change is 0.20. Mars can buy its shares for 1 million Dogecoin, pocketing a risk-free net utility equivalent to 4 million Dogecoin.

I'm confused - if the prior probability of a coup is 20% and Mars is buying shares that pay out if no coup, Mars would pay 4M?

Thanks for the interesting question.  So now the other question: it seems that these payments make these prediction markets causal, they themselves affect the outcome of their own predictions.  

This seems like a bug.  What about a prediction market based on 'reputation', where you start with little reputation and each accurate prediction, made in advance of the event happening and signed to the blockchain, increases reputation.  You could also in theory use a similar kind of market for 'observation', as in, an observer who is a fair observer of events would record what they observed and gain reputation while 'alternative facts' biased observers lose reputation.  Presumably the reputation updates would require some kind of inference to be performed automatically. 

It has occurred to me that to make this work, both "observers" and "predictors" must be AI systems with fixed source code with their hashes committed to the blockchain.  This makes them deterministic and this determinism can be checked by all chain members.  

Anyways regardless of how we do it, this seems like a bug.  The reason the "market price" is a fair price is because if it were consistently unfair, someone could make money off trades with their knowledge of the consistent unfairness, and after they gain sufficiently money, their 'votes' as a market participant grow in power until well informed participants effectively control the market price.  (IRL example : hedge funds).  

Presumably a market with 'reputation' or some other meta value that can be gained or lost would have this same convergence.  

So then how do you reward market participants to give them an incentive to gain reputation.  What if...you could put predictions/observations onto the blockchain in encrypted form and later put on the blockchain the key.  Then you could get paid as a high reputation observer/predictor to share your observations/predictions in advance with paying customers. 

The mechanics here are pretty similar to assassination markets.

Built in to the premise of the question is that Earth values Ceres' loyalty more than Mars (otherwise Mars presumably wouldn't be able to use the prediction market as a hedge). I agree (I think?) that the prediction market lets you outsource the work to space pirates, but it seems also necessary to point out that at Earth is sending at least as much money as a counter force (encouraging 3rd parties to keep Ceres loyal).