Comment by NoboruWataya
4 hours ago
> When they know exactly when something is going to happen, buying put options that are cheap because they're slightly out of the money seems like it would be pretty effective.
But you don't know exactly what would happen. You know what you will do, but not how it will affect the company's stock price. Maybe it will go down a little, maybe it will go down a lot. Maybe you kill the CEO on the same day as good news is published about the company, which offsets the drop. Or maybe the market just decides the guy wasn't that good a CEO anyway. So you bought a bunch of cheap puts with a strike price of 100, but the stock only drops to 101, and you lose everything. You can buy puts with a higher strike but they will be more expensive.
> Leverage gives them a larger incentive, but there are plenty of wages to place a leveraged bet in the stock market.
Yes, but they are expensive, is my point.
Generally, the disincentive outweighs the incentive. You can increase the incentive through leverage. But that also increases the costs, which increases the disincentive.
There may well be situations where the incentive outweighs the disincentive. But in the context of traditional financial markets I think those situations are likely very rare due to the risks and costs, whereas with a predictions market the risks and costs could be reduced, so it is more likely to happen.
> But you don't know exactly what would happen. You know what you will do, but not how it will affect the company's stock price. Maybe it will go down a little, maybe it will go down a lot. Maybe you kill the CEO on the same day as good news is published about the company, which offsets the drop.
You never know exactly what would happen. You know what you will do, but not if the CEO is going to catch the flu and not show up that day, or have better security than you were expecting, or have a great surgeon, or a spouse who is willing to keep them on life support until after your prediction market contract expires.
> Yes, but they are expensive, is my point.
Only they're not. There are many ways to bet all or nothing on something people generally expect to have a <1% chance of happening, so that you either lose $1000 or make $100,000. Under normal circumstances you could make that bet 100 times in a row and lose $100,000 and the counterparty is happy to take all your money, but if you're able to do something to change the outcome yourself then it's different, which is why it's the same.