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comment by Jonathan_Graehl · 2021-04-30T23:09:07.496Z · LW(p) · GW(p)

This may have made sense to the author, but to me it's unclear and unmotivated.

Replies from: mark-xu
comment by Mark Xu (mark-xu) · 2021-05-01T00:31:18.232Z · LW(p) · GW(p)

Can you be more specific?

comment by Zolmeister · 2021-05-01T03:16:44.805Z · LW(p) · GW(p)

Technically, the market I should make corresponds to what I think other people's probabilities are likely to be given they can see my market. I might give a wider market because only people that think they're getting a good deal with trade with me

Technically, market making is betting on price volatility by providing liquidity. To illustrate, I'll use a simple automated market maker.

Yes * No = Const

This means I will accept any trade of Yes/No tokens, so long as the product remains constant. Slippage is proportional to the quantity of tokens available. Profit is made via trading fees.

There is a risk that the underlying assets diverge more quickly than what slippage/fees can cover, which can cause losses. There are various tricks to mitigate these effects, such that profit can be guaranteed within certain bounds.

The point being I'm no longer betting on Alice's height, but instead betting that predictors will trade against the current height.

comment by philh · 2021-05-05T00:20:18.188Z · LW(p) · GW(p)

Minor, but: 5'11 is 71 inches and 6'5 is 77. And if Alice turns out to be 5'0 your friend would owe you $11, but if she's 6'0 you'd owe him $1.