Comment by mrandish
17 hours ago
> I bet the average price for a no bet across these markets is 73 cents.
Behavioral economics has already answered the question of whether humans are, on average, perfectly rational economic actors. They are not.
To the contrary, there is substantial evidence indicating a meaningful number of humans will mis-estimate the likelihood of uncommon future events.
It doesn't matter if a vast majority of people are not rational economic actors. It only takes 1 rational actor with enough capital to take the other side of all the bad bets, and the market will be priced correctly even if the other 99 people are irrational.
'Enough' [capital] is doing a lot of work in that sentence. In the limit of a one-sided irrational market, the 'rational actor' would need to take the other side of every open transaction.
Yeah, but in the limit of a one-sided irrational market, the rational actor is going to be given as much capital as he can take.
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Well, if the price would be incorrectly set, then bots like this one would make money, which would in sufficient time cause the market to adapt and the average price would change so the bot doesn't work.
That doesn't matter so much when it happens in a place where people can make money from other people's irrationality. Even if there are a bunch of irrational people placing bad bets on uncommon future events, rational people looking to make a buck will take the other side of that bet, until the price is sensible.
The alternative would be that there's a bunch of free money sitting there waiting for someone to decide to pick it up, and nobody is, not even you.
Actually, having a bunch of noise traders around is a great attraction for the ration people to show up.