Comment by drdeca
4 days ago
One issue I see for applying prediction markets to things like “there is a commercially successful fusion power plant before the year 2070” is the long time until resolution. Now, of course, one can hope to sell your shares in “yes” or “no” 5 years from now, but there may not be enough liquidity?
Suppose we had one prediction market M_1 for “On January 1st 2070, resolves ‘yes’ if there has been a commercially successful nuclear fusion power plant, and otherwise resolves ‘no’”, and then another market M_2 that, maybe it resolves in 5 years as ‘yes’ if the price of M_1’s ‘yes’ is greater than 30%? Or… hm, that seems problematic because people could just buy a bunch of M_1’s “yes” right before M_2 resolves? Or maybe that’s a self-correcting problem because people could… no, still seems like a problem..
Well, what if instead of a prediction market about the future value of another prediction market, it was futures contracts for the shares in a prediction market? Like, the right to buy or sell shares in “yes” or “no” at a particular price?
So like, if you’re confident that the prediction market will assign probability p or higher on a particular day 5 years from now, then if you bought futures which, on that day each of the futures could be used to sell a share in “no” at the price (1-p), then… well, if the probability assigned to “yes” on that day is indeed p or higher, then the price of “no” would be (1-p) or lower, so one buy a share in “no” at a price less than (1-p) and then sell it at (1-p)..
Hm, issue there is one still needs to buy the “no” in order to sell it, so that doesn’t seem to really fix the “what if there is no liquidity in 5 years?” issue?
I guess one could spend 1 to create a share of “yes” and a share of “no”, and then sell the “no”, and be left with the share in “yes” which is ostensibly worth at least p, and then like, sell it a bit later when there’s more liquidity or something?
I probably don’t know what I’m talking about about this.
You should look into options - you're describing various forms of options contract.
None of them solve this problem, though:
> Now, of course, one can hope to sell your shares in “yes” or “no” 5 years from now, but there may not be enough liquidity?
In general, if there isn't liquidity in the primary market you should expect the derivative markets to be even worse. You would use options not to find extra liquidity - and binary options on illiquid markets like you describe are indeed particularly prone to market manipulation - but to express very particular views.
> another market M_2 that, maybe it resolves in 5 years as ‘yes’ if the price of M_1’s ‘yes’ is greater than 30%?
Like this one - you should buy this contract if you really do want to make a bet the price will be over 30%, and you don't care much about getting a big payday if the price is 90 or keeping most of your money if the price is 29.
The future value could be shared with the entire humanity.
For example, Bill Gates is going to die like everyone else and give most of the money away, like Warren Buffet.
They can spend a significant amount of money in life if they see nuclear fusion is possible, even if they do not recover the costs.
The only thing that is needed for this to happen is investors being confident that the money is not going to be wasted.
I personally know rich people that are betting a significant part of their wealth in fusion(millions USD) even when they know there is a risk that they will never recover the money.
Poor Bill Gates wants to give his money away, but he hasn’t gotten around to it yet. Why are we still pretending he is a philanthropist and not one of the biggest oligarchs of our time?
Is he one of the richest people in the world?
Yes
Has given money in the order of hundreds of billions to charity?
Yes
Both can be true.
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As I understand it, most of his wealth is tied up in Microsoft stocks, so without collapsing the company he built, his hands are at least partially tied.
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> Bill Gates wants to give his money away, but he hasn’t gotten around to it yet
How much have you given away? If you just don't like rich people, say that, don't disguise it with false facts and moralising.
> Why are we still pretending he is a philanthropist and not one of the biggest oligarchs of our time?
My pet is both a cat and brown coated.
I don't think a long pay-off horizon is a problem for this market. It the same as for shares in companies that don't pay dividends. What creates a price for Berkshire Hathaway (BRK/A) if owning the share never gives you anything in the form of dividend? It's because in the far future, you can be confident they'll have enough money in the bank that they will pay out. Maybe not in your lifetime, but you can sell to someone, who'll sell to someone, etc. who will eventually collect a dividend. The market is so abstract that that pay-off time could be infinity years in the future and still, the share still has market value today.
How would you define "commercially successful"? The first fusion power plants will only get built with huge government subsides. Some governments like China look at this as a strategic, existential issue and will pay whatever it costs to make it work. They don't like being dependent on foreign fossil fuel supplies that the USA could easily interdict.
I’m in the USA and don’t like being dependent on foreign fuel supplies!
I think there was (maybe still possible?) a real missed opportunity to pitch green energy in a national security or America First way. I don’t think the average republican voter wants us to be as tied to OPEC the way we are.
We could still product as much—or more!—oil in Texas while reducing our care for anything in the Middle East.
The US is a net fossil fuel exporter at this point. In 2023 we inported $283 billion in fossil fuels and exported $361 billion (sauce: https://oec.world/en/profile/country/usa?yearlyTradeFlowSele...)
The real missed opportunity IMO is one of not communicating how well we are doing.
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Green energy has its own fundamental economic advantages over any petroleum energy generation. You know, barring grid and storage adaptation.
I believe the trend in Lazards is that storage+wind or storage+solar will drop under natural gas combined cycle this year or next year on a LCOE basis.
> first fusion power plants will only get built with huge government subsides
This is true of every energy system ever.
I believe that was actually their point. To say that it is still a long way before a functioning fusion reactor will be build, let alone the first that will be built as commercially viable standalone without subsidies.
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I just meant “they generate power and sell it”, which, I realize now isn’t exactly what I said / what I said wasn’t exactly what I meant.
I mean I could generate power and sell it by burning antique furniture but that doesn't make it commercially viable. At some point any new power source will have to show a positive return on investment by some reasonable accounting measure.
At this point, just go to a casino. The last thing our world needs is more gambling and fruitless speculation.
Speculation with positive expected return is a good thing. So the question is, does fusion have positive expected return?
The world spends 10% of global GDP on energy, about $10 trillion per year. The world will spend something like a quadrillion dollars on energy this century, possibly more as the world gets wealthier and per capita energy use increases. A billion dollar investment is just one part in a million of that. Fusion doesn't have to be very likely to succeed to make such speculation worthwhile.
I was talking about prediction markets, not fusion.
It’s not that I want to bet, but that I want a good probability estimate about whether commercially viable fusion power will be around by such and such date.
No, we'd simply get another financial product completely detached from any real economic value, of which we have plenty already.
What more insight could gamblers provide about nuclear fusion that expert physicists and engineers can't? Why and how would their predictions be more accurate than industry leaders?
Prediction markets are known to have an optimism bias when it comes to stuff like this.