So once we are interested in prediction markets and would like to try them out, we need to pick one. There are several. I generally ignore the ‘play money’ markets like the Hollywood Stock Exchange, despite their similar levels of accuracy to the real money markets; I just have a prejudice that if I make a killing, then I ought to have a real reward like a nice steak dinner and not just increment some bits on a computer. The primary markets to consider are:

I didn’t want to wager too much money on what was only a lark, and the IEM has the favorable distinction of being clearly legal in the USA. So I chose them.

Is it any surprise I lighted on Obama? He had impressed me (and just about everyone else) with his 2004 convention speech, his campaign seemed quite competent and well-funded, the media clearly loved him, and so on. Best of all, his shares were relatively low (30-40%) and I had money left after the Republicans. So I bought Obama and sold Clinton. I eventually sold out of Obama at the quite respectable 78¢.

I eventually ruled out John Edwards as having no compelling characteristics and smacking of phoniness (much like Romney). I was never tempted to change my mind on him, and the adultery and hair flaps turned out to be waiting in the wings for him. So I could get rid of Edwards as a choice.

A similar process obtained for the Democrats. A certain dislike of Hillary Clinton led me to think that her status as the heir presumptive (reflected in share prices) would be damaged at some point. All of the other candidates struck me as flakes and hopeless causes, with the exception of John Edwards and Barack Obama.

But hey, his shares were trading in the 5-15% range. They were the best bargain going in the market. I held them for a long time and ultimately would sell them at 94-99¢ for a roughly 900% gain. (I sold them instead of waiting for the Republican convention because I was forgoing minimal gains, and I was concerned by reports on his health.)

This didn’t leave very many candidates for consideration. By this process of elimination, I was in fact left with only John McCain as a serious Republican contender. If you remember the early days, this was in fact a very strange result to reach: John McCain appeared tired, a beaten man from 2004 making one last pro forma try, his campaign inept and riven by infighting, and he was just in general—old, old, old.

The key to Republican betting was figuring out who was hopeless, and work from there by essentially short selling them. As time passed, one could sharpen one’s bets and begin betting for a candidate rather than against. My list ultimately looked like this:

As in 2004, the odds of an ultimate Republican victory were far too low—hovering in the range of 30-40%. This is obviously wrong on purely historical considerations (Democrats don’t win the presidency that often), and seems particularly wrong when we consider that George W. Bush won in 2004. Anyone arguing that GWB poisoned the well for a succeeding Republican administration faces the difficult task of explaining (at least) 2 things:

In 2007, the presidential markets started back up! I surveyed the markets and the political field with great excitement. As anyone remembers, it was the most interesting election in a very long, with such memorable characters (Hillary Clinton, Ron Paul, Barack Obama, John McCain, Sarah Palin) and unexpected twists.

As you know, I was quite wrong in this strategy. Bush did win, and won more than in 2000. And I lost $5-10. (Between a quarter and a half my initial capital. Ouch! I was glad I hadn’t invested some more substantial sum like $200.) I had profited early on from people who had confused what they wanted to happen with what would, but then I had succumbed to the same thing. Yes, everyone around me (I live in a liberal state) was sure Kerry would win, but that’s no excuse for starting off with a correct assessment and then choosing a false one. It was a valuable lesson for me; this experience makes me sometimes wonder whether ‘personal’ prediction markets, if you will, could be a useful tool.

I did well on these trades, and then in October, I closed out all my trades, sold my Republican/Bush shares, and bought Kerry. I thought the debates had gone well for Kerry and was confident the Swift Boating wouldn’t do much in the end, and certainly couldn’t compensate for the albatross of Iraq.

2004 was, of course, a presidential election year. I couldn’t resist, and traded heavily. I avoided Democratic nominations, reasoning that I was too ignorant that year—which was true, I did not expect John Kerry to eventually win the nomination—and focused on the party-victory market. The traders there were far too optimistic about a Democratic victory; I knew ‘Bush is a war-time president’ (in addition to the incumbency!) as people said, and that this matter a lot to the half of the electorate that voted for him in 2000. Giving him a re-election probability of under 40% was too foolish for words.

I began experimenting with some small trades on IEM’s Federal Reserve interest rate market; I had a theory that there was a ‘favorites bias’ (the inverse of long-shot favoritism, where traders buck the conventional wisdom despite it being more correct). I simply based my trades on what I read in the New York Times. It worked fairly well. In 2005, I also dabbled in the markets on Microsoft and Apple share prices, but I didn’t find any values I liked.

Prediction markets are known to have a number of biases. Some of these biases are shared with other betting exchanges; horse-racing is plagued with a ‘long-shot favoritism’ just like prediction markets are. (An example of long-shot favoritism would be Intrade and IEM shares for libertarian Ron Paul winning the 2008 Republican nomination trading at ludicrous valuations like 10¢, or Al Gore—who wasn’t even running—for the Democratic nomination at 5¢.) The financial structure of markets also seems to make shorting of such low-value (but still over-valued) shares more difficult. They can be manipulated, consciously or unconsciously, due to not being very good markets ( “They are thin, trading volumes are anemic, and the dollar amounts at risk are pitifully small” ), and that’s where they aren’t reflecting the prejudices of their users (one can’t help but suspect Ron Paul shares were overpriced because he has so many fans among techies).

In 2003, I sent in a check for $20. A given market’s contracts in the IEM are supposed to sum to $1, so $20 would let me buy around 40 shares—enough to play around with.

When I got out of the IEM, I reflected on my trades: I learned some valuable lessons, I had a good experience, and I came out a believer. I resolved that one day I’d like to try out a more substantial and varied market, like Intrade.

And finally, I’ve concluded that my few observations aside, prediction markets are pretty accurate. I often use them to sanity-check myself by asking ‘If I disagree, what special knowledge do I have?’ Often I have none.

Further, I had learned a valuable lesson in 2004 about my own political biases and irrationality, and had earned the right in 2008 to be smug about foreseeing a McCain and Obama match-up when the majority of pundits were trying to figure out whether Hillary would be running against Huckabee or Romney.

By the end of the election, I had made a killing on my Obama and McCain shares. My account balance stood at $38; so over the 3 or 4 years of trading I had nearly doubled my investment. $18 is perhaps enough for a steak dinner.

Fortunately for my decision to cash out (I didn’t see anything I wanted to risk holding for more than a few weeks), prices had moved enough that I didn’t have to take any losses on any positions , and I wound up with $223.32. The $5 for January had already been assessed, and there is a 5 euro fee for a check withdrawal, so my check will actually be for something more like $217, a net profit of $17.

And more generally, assuming that this isn’t raiding accounts as a prelude to shutting down (as a number of forumers claim), Intrade is no longer useful for LessWrongers like me as it is heavily penalizing small long-term bets like the ones we are usually concerned with—bets intended to be educational or informative. It may be time to investigate other prediction markets like Betfair, or just resign ourselves to non-monetary/play-money sites like PredictionBook.com .

I don’t trade very often since I think I’m best at spotting mispricings over the long-term (the CA Proposition 19 contract (WP) being a case in point; despite being ultimately correct, I could have been mauled by some of the spikes if I had tried only short-term trades). If this fee had been in place since I joined, I would be down by $30 or $40.

Initially, the new changes didn’t seem so bad to me, but then I compared the annual cost of this fee to my trading stake, ~$200. I would have to earn a return of 30% just to cover the fee! (This is also pointed out by many in the forum thread above.)

In January 2011 , Intrade announced a new fee structure—instead of paying a few cents per trade, one has free trading but your account is charged $5 every month or $60 a year (see also the forum announcement ). Fees have been a problem with Intrade in the past due to the small amounts usually wagered—see for example financial journalist Felix Salmon’s 2008 complaints .

By 2011-01-01, the nominee odds were still stuck at 18% but the announcement had fallen to 62%. The latter is dramatic enough that I’m wondering whether my 90% odds really are correct (it probably wasn’t). By June, I’ve begun to think that Palin knows she has little chance of winning either the nomination or presidency, and is just milking the speculation for all its worth. Checking on 8 June, I see that the odds of an announcement have fallen from 62% to 33% and a nomination from 18% to 5.9%—so I would have made out very nicely on the nomination contract had I held the short, but been mauled if I had made any shorts on the announcement. I am not sure what lesson to draw from this observation; probably that I am better at assessing outcomes based on a great many people (like a nomination) than outcomes based on a single individual person’s psychology (like whether to announce a run or not).

I shorted 10 at 18% since I thought the true odds are more like 10% . 2 days later, they had risen to 19%. By 26 November, they were still at 19%, but the odds of her announcing a candidacy had risen to 75%. I’d put the odds of her announcing a run at ~90% (a mistake, given that she ultimately decided against running in October 2011), but I don’t have any spare cash to buy contracts. I could sell out of the anti-nomination contracts and put that money into announcement, but I’m not sure this is a good idea—the announcement is very volatile, and I dislike eating the fees. She hasn’t done too well as the Tea Party eminence grise, but maybe she prefers it to the hard work of a national campaign?

Finally, I decided that Sarah Palin has next to no chance at the Republican nomination since she blew a major hole in her credentials by her bizarre resignation as governor, and her shares at 18% were just crazy.

I bought 5 Reps at 39, and shorted 1 Dem at 60.8. 2 days later, they had changed to 37.5 and 62.8 respectively. By 2010-11-26, it was 42 and 56.4. By 2011-01-01, Republicans was at 39.8 and Democrats at 56.8.

My second trade dipped into the highly liquid 2012 US presidential elections. The partisan contracts were trading at ~36% for the Republicans and ~73% for the Democrats . I would agree that the true odds are >50% for the Democrats since presidents are usually re-elected and the Republicans have few good-looking candidates compared to Obama, who has accomplished quite a bit in office. However, I think 73% is overstated, and further, that the markets always panic during an election and squish the ratio to around 50:50. So I sold Democrat and bought Republican. (I wound up purchasing more Republican contracts than selling Democrat contracts because of the aforementioned margin issues.)

It was at 49 when I shorted it. I put around 20% of my portfolio (or ~$40) after consulting with the Kelly criterion . 2 days later, the price had increased to 53.3, and on 4 October, it had spiked all the way to 76%. I began to seriously consider how confident I was in my prediction, and whether I was faced with a choice between losing the full $40 I had invested or buying shares at 76% (to fulfill my shorting contracts) and eating the loss of ~$20. I meditated, and reasoned that there wasn’t that much liquidity and I had found no germane information online (like a poll registering strong public support), and decided to hold onto my shares. As of 27 October, the price had plummeted all the way to 27%, and continued to bounce around the 25-35% price range. I had at the beginning decided that the true probability was in the 30% decile, and if anything, it was now underpriced. Given that, I was running a risk holding onto my shorts. So on 30 October, I bought 10 shares at 26%, closing out my shorts, and netting me $75.83, for a return of $25.83, or 50% over the month I held it.

My first trade was to sell short the Intrade contract on California Proposition 19 (2010) , which would legalize non-medical marijuana possession. I reasoned that California recently banned gay marriage at the polls, and medical marijuana is well-known as a joke (lessening the incentive to pass Prop 19), and that its true probability of passing was more like 30%—well below its current price. The contract would expire in just 2 months, making it even more attractive.

I wanted to sell short some of the more crazy probabilities such as on Japan going nuclear or the USA attacking North Korea or Iran, but it turned out that to make even small profits on them, I would have to hold them a long time and because their probabilities were so low already, Intrade was demanding large margins —to buy 4 or 5 shorts would lock up half my account!

Intrade has a considerably less usable system than IEM. In IEM, selling short is very easy: you purchase a pair of contracts (yes/no) which sum to $0, and then you sell off the opposite. If I think DEM08 is too high compared to REP08, I get 1 share of each and sell the DEM08. Intrade, on the other hand, requires you to ‘sell’ a share. I don’t entirely understand it, but it seems to be equivalent.

Paying Intrade, as a foreign company in Ireland, was a little tricky. I first looked into paying via debit card, but Intrade demanded considerable documentation, so I abandoned that approach. I then tried a bank transfer since that would be quick; but my credit union failed me and said Intrade had not provided enough information (which seemed unlikely to me, and Intrade’s customer service agreed)—and even if they had, they would charge me $10! Finally, I decide to just snail-mail them a check. I was pleasantly surprised to see that postage to Ireland was ~$1, and it made it there without a problem. But very slowly: perhaps 15 days or so before the check finally cleared and my initial $200 was deposited.

In May-June 2011, Bitcoin, an online currency, underwent approximately 5-6 doublings of its exchange rate against the US dollar, drawing the interest of much of the tech world and myself. (I had first heard of it when it was at 50 cents to the dollar, but had written it off as not worth my time to investigate in detail.)

During the first doubling, when it hit parity with the dollar, I began reading up on it and acquired a Bitcoin of my own—a donation from Kiba to try out Witcoin, which was a social news site where votes are worth fractions of bitcoins. I then gave my thoughts on LessWrong when the topic came up:

After thinking about it and looking at the current community and the surprising amount of activity being conducted in bitcoins, I estimate that bitcoin has somewhere between 0 and 0.1% chance of eventually replacing a decent size fiat currency, which would put the value of a bitcoin at anywhere upwards of $10,000 a bitcoin. (Match the existing outstanding number of whatever currency to 21m bitcoins. Many currencies have billions or trillions outstanding.) Cut that in half to $5000, and call the probability an even 0.05% (average of 0 and 0.1%), and my expected utility/value for possessing a coin is $25 a bitcoin (5000⋅0.005).

I was more than a little surprised that by June, my expected value had already been surpassed by the market value of bitcoins. Which leads to a tricky question: should I sell now? If Bitcoin is a bubble as frequently argued, then I would be foolish not to sell my 5 bitcoins for a cool $130 (excluding transaction costs). But… I had not expected Bitcoin to rise so much, and if Bitcoin did better than I expected, doesn’t it follow that I should no longer believe the probability of success is merely 0.05%? Shouldn’t it have increased a bit? Even if it increased only to 0.07%, that would make the EV more like $35 and so I would continue to hold bitcoins.

The stakes are high. It is a curious problem, but it’s also a prediction market. One is simply predicting what the ultimate price of bitcoins will be. Will they be worthless, or a global currency? The current price is the probability, against an unknown payoff. To predict the latter, one simply holds bitcoins. To predict the former, one simply sells bitcoins. Bitcoins are not commodities in any sense. Buying a cow is not a prediction market on beef because the value of beef can’t drop to literally 0: you can always eat it. You can’t eat bitcoins or do anything at all with them. They are even more purely money than fiat money (the US government having perpetual problems with the zinc or nickel or copper in its coins being worth more as metal than as coins, and dollars are a tough linen fabric).

Mencius Moldbug turns out to have a similar analysis of the situation:

If Bitcoin becomes the new global monetary system, one bitcoin purchased today (for 90 cents, last time I checked) will make you a very wealthy individual. You are essentially buying Manhattan for a quarter. There are only 21 million bitcoins (including those not yet minted). (In my design, this was a far more elegant 264, with quantities in exponential notation. Just sayin’.) Mapped to $100 trillion of global money, to pull a random number out of the air, you become a millionaire. Wow! So even if the probability of Bitcoin succeeding is epsilon, a million to one, it’s still worthwhile for anyone to buy at least a few bitcoins now. The currency thus derives an initial value from this probability, and boots itself into existence from pure worthlessness—becoming a viable repository of savings. If a very strange, dangerous and unstable one. I think the probability of Bitcoin succeeding is very low. I would not put it at a million to one, though, so I recommend that you go out and buy a few bitcoins if you have the technical chops. My financial advice is to not buy more than ten , which should be F-U money if Bitcoin wins.

Bitcoin cumulatively represents my largest ever wager in a prediction market; at stake was >$130 in losses (if bitcoins go to zero), or indefinite thousands. It will be very interesting to see what happens. By 2011-08-05, Bitcoin has worked its way down to around $10/₿, making my net worth $26; I did spend several bitcoins on the Silk Road 1, though. By 2011-11-23, it had trended down to $2.35/₿, but due to a large donation of 20 bitcoins, I spent most of my balance at the Silk Road, leaving me with 4.7 bitcoins. Overall, not a good start. By July 2012, donations brought my stock up to ₿12.5 with prices trading at $5-7. After an unexpected spike on 17 July to $9, I did some reading and learned that “pirateat40” (the operator of a possible Ponzi scheme) was boasting in #bitcoin (Reddit discussion) of using the funds to manipulate the market in an apparent pump and dump scheme and also mocking the ignorance of most buyers and sellers for not paying attention to the Bitcoin forums or IRC channel. pirateat40’s manipulation and insinuation of future plans sourced me on holding many bitcoins, and I resolved to sell if the price on MtGox went quickly back up to >$9; it did so the next day (18 July), I sold at $9.17. Withdrawing from MtGox turns out to be a major pain, with Dwolla withdrawal requiring providing documentation like a passport and a bank transfer costing $25. I ultimately used the #bitcoin-otc channel to arrange a swap with “nanotube” of my $115 MtGox dollars for an equivalent donation to my Paypal account. The next day, the price had fallen to $7.77; demonstrating why I don’t try to time markets, by 11 August, the price had jumped to $11.50. This was a little worrisome for my long-term views that there’s a good chance the Ponzi scheme will be used in market manipulation or collapse, but there’s still much time left. A few days later, the price had spiked as high as $15, and I felt like quite a fool; but that’s the marvelous thing about markets, one day you are a genius and the next you are fool. Unexpectedly, pirateat40 announced the dissolution of his BTCST. Was it a Ponzi or not? No one knew. Perhaps on fears of that, or perhaps because pirateat40 was fleeing with the funds, on the 18-19 August, the price began dropping, and kept dropping, all the way through $10, then $9, then $8. Watching this, I resolved to buy back in. It was very difficult to find anyone who would accept PayPal on #bitcoin-otc , but ultimately Namegduf agreed to a MtGox voucher swap, and I got $60 which I then spent at $7.8 for ₿7.6. In late February 2013, Bitcoin was almost at its all-time high of $31, and I happened to also need cash badly; I had received additional donations, so I sold out my ₿5.79 at $31.5 even as the price reached $32—I just wanted to be out of what might have been another bubble. I then watched slackjawed as the bubble failed to pop, failed to keep its price-level, but instead doubled to $60, doubled again to $120, hit $159 on 2013-04-07, having quintupled since I decided to sell out, and finally peaked at $266 2 days later before falling back down to a steady-state of ~$100. That sale was not a great testament to my market timing skills, and prompted me to rethink my opinions about Bitcoin. At various points through August 2013, I sold on #bitcoin-otc ₿0.5 for $52, ₿0.28 for $50, & ₿1.15 for $120, ₿0.5 for $66 & $64, ₿0.25 for $32, ₿0.1 for $13, and ₿1.0 for $127 & $129—leaving me uncomfortably exposed at ₿18 (having had difficulty finding trustworthy buyers). On 2013-10-02, the news burst that Silk Road had been busted & DPR arrested & charged; Bitcoin immediately began dropping by $20–$40 from ~$127 (depending on exchange), so I purchased ₿2.7 for $105 each.

(One might wonder why I don’t use the fairly active Bets of Bitcoin prediction market; that is because the payout rules are insane and I have no idea how to translate the “total weighted bets” into actual probabilities—Betting blind is never a good idea. And I have no interest in ever using BitBet as they brazenly steal from users.)