The purpose of any price-based system is to communicate knowledge, not necessarily insider knowledge.
There are actually two theories on insider knowledge. One states that allowing insider trading is beneficial, as it allows prices to better match the underlying reality, the other states that this discourages non-insider trading, which actually makes the prices worse. Stock markets lean heavily towards the second theory, while prediction markets seem to be leaning towards the first.
Why would encouraging non-insider training be desirable in the first place, other than to create a more high-status form of gambling, with higher spouse acceptance factor than smoke-filled room poker games? People with no inside knowledge[0] are just trading on vibes, how is that useful for the economy?
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[0] - Or external knowledge, but actual knowledge - thinking of hedge funds stalking CEOs as they fly in private jets, or counting cars in parking lots from satellite photos, to get some probability estimates on factors actually relevant to the performance of a business and possible future events.
The stock market wasn't designed to be gambling. You're buying a piece of a company. They want people to come so they can raise money for expanding businesses. If insider trading benefits some at the expense of others, people won't come.
Obviously it has come a long way from that, and the markets have become more like gambling. You could probably allow insider trading at this point and the system would continue just fine.
Hmm yeah it depends on your definition of insider. If you assume all raw information is public-ish, a market can reward those who can synthesize/operate on that knowledge to predict better. (The cars in the lot, etc. there is friction to this discovery; the knowledge can be communicated to others through the market after discovery to profit off the initial cost of discovery). There is symmetric competition to some degree. If you have true non public knowledge (I’m going to say something to tank the stock on this date) then you are purely extracting value from others because you will always win; they will never have that info and the incentive for anyone else to participate in price discovery would go away.
Non-insider trading is liquidity. That’s why people pay for retail trading volume (payment for order flow). Not because of nefarious reasons. Just because it represents liquidity. With no liquidity it’s impossible to enter or exit trades efficiently.
>the other states that this discourages non-insider trading, which actually makes the prices worse
This theory is fundamentally not credible, the other side of any trade you make on the stock market is essentially always going to be vastly more sophisticated than you. Insider trading makes zero difference to the end-user.
The credible argument against insider trading is that it's a form of theft. You are making trades based on information which does not belong to you, and which you have an obvious duty to protect. You are essentially stealing from the people you work for.
Stock markets also want to keep executives honest. When the insider can affect the outcome, it creates bad motives. They don't want the CEO selling a bunch of puts, then deliberately tanking the stock. Not for the other bettors, but because the institution is about business.
Prediction markets are doing a bit of that. Some won't take bets on an assassination.
You can bet on assassination. There are polymarket prediction markets for leaders of many countries where you can bet on if they will cease to be the leader by X date, for any reason.
If they get assassinated, those markets will resolve to yes. At least the rules don't specifically exclude that.
In the hypothetical Anarcho-Capitalist finance world, the remedy for a breach of fiduciary duty (corporate graft / insider tips) looks more like Jim Bell than Chuck Rhoades.
>The purpose of the Ukrainian military is to get stuck in a years-long stalemate with Russia.
>These are obviously false.
The purpose of the Ukrainian military is to exhaust the Russian army's materiel and test out our weapons. "Years-long stalemate with Russia? Yes, please." -the US. Seems like an overwhelmingly common Scott Alexander L.
Not just insider knowledge. Being more willing to put in hard work than anyone else, being better at synthesizing public knowledge, or maintaining a more clear and unemotional outlook all can also lead you to superior outcomes.
To say the purpose of a market is to reveal insider information is how you say insider trading is a good thing without saying insider trading is a good thing.
There's a ton of scholarly debate about it, and at least most of the early stuff was pretty earnest. But rather than the debate becoming more refined and nuanced over time it seems to have bifurcated along partisan (or partisan adjacent) lines like everything else, similar to the Keynesian/Misesian divide.
The proof that free markets are efficient (even in the narrow sense economists use this word) relies on an assumption of perfect information. This has been known at least since Akerlof.
The Misesian folks are a lost cause, IMHO. They're hardcore rationalists, self-indulging in circular moral arguments from assumptions that don't apply in the real world.
The purpose of any price-based system is to communicate knowledge, not necessarily insider knowledge.
There are actually two theories on insider knowledge. One states that allowing insider trading is beneficial, as it allows prices to better match the underlying reality, the other states that this discourages non-insider trading, which actually makes the prices worse. Stock markets lean heavily towards the second theory, while prediction markets seem to be leaning towards the first.
Why would encouraging non-insider training be desirable in the first place, other than to create a more high-status form of gambling, with higher spouse acceptance factor than smoke-filled room poker games? People with no inside knowledge[0] are just trading on vibes, how is that useful for the economy?
--
[0] - Or external knowledge, but actual knowledge - thinking of hedge funds stalking CEOs as they fly in private jets, or counting cars in parking lots from satellite photos, to get some probability estimates on factors actually relevant to the performance of a business and possible future events.
The stock market wasn't designed to be gambling. You're buying a piece of a company. They want people to come so they can raise money for expanding businesses. If insider trading benefits some at the expense of others, people won't come.
Obviously it has come a long way from that, and the markets have become more like gambling. You could probably allow insider trading at this point and the system would continue just fine.
Hmm yeah it depends on your definition of insider. If you assume all raw information is public-ish, a market can reward those who can synthesize/operate on that knowledge to predict better. (The cars in the lot, etc. there is friction to this discovery; the knowledge can be communicated to others through the market after discovery to profit off the initial cost of discovery). There is symmetric competition to some degree. If you have true non public knowledge (I’m going to say something to tank the stock on this date) then you are purely extracting value from others because you will always win; they will never have that info and the incentive for anyone else to participate in price discovery would go away.
Non-insider trading is liquidity. That’s why people pay for retail trading volume (payment for order flow). Not because of nefarious reasons. Just because it represents liquidity. With no liquidity it’s impossible to enter or exit trades efficiently.
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>the other states that this discourages non-insider trading, which actually makes the prices worse
This theory is fundamentally not credible, the other side of any trade you make on the stock market is essentially always going to be vastly more sophisticated than you. Insider trading makes zero difference to the end-user.
The credible argument against insider trading is that it's a form of theft. You are making trades based on information which does not belong to you, and which you have an obvious duty to protect. You are essentially stealing from the people you work for.
I would say corruption and not theft
Stock markets also want to keep executives honest. When the insider can affect the outcome, it creates bad motives. They don't want the CEO selling a bunch of puts, then deliberately tanking the stock. Not for the other bettors, but because the institution is about business.
Prediction markets are doing a bit of that. Some won't take bets on an assassination.
You can bet on assassination. There are polymarket prediction markets for leaders of many countries where you can bet on if they will cease to be the leader by X date, for any reason.
If they get assassinated, those markets will resolve to yes. At least the rules don't specifically exclude that.
In the hypothetical Anarcho-Capitalist finance world, the remedy for a breach of fiduciary duty (corporate graft / insider tips) looks more like Jim Bell than Chuck Rhoades.
https://en.wikipedia.org/wiki/The_purpose_of_a_system_is_wha...
Compare and contrast https://www.astralcodexten.com/p/come-on-obviously-the-purpo...
Why does the page have a non-removable blue filter? Feels like a popup shadow that doesn't go away...
>The purpose of the Ukrainian military is to get stuck in a years-long stalemate with Russia.
>These are obviously false.
The purpose of the Ukrainian military is to exhaust the Russian army's materiel and test out our weapons. "Years-long stalemate with Russia? Yes, please." -the US. Seems like an overwhelmingly common Scott Alexander L.
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I was shocked at how shallow that take is. I expected more.
Is the purpose of replying to Wikipedia with random substack drivel to get downvoted? Or is it a byproduct of the system?
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Not just insider knowledge. Being more willing to put in hard work than anyone else, being better at synthesizing public knowledge, or maintaining a more clear and unemotional outlook all can also lead you to superior outcomes.
That isn’t how they were pitched to the FTC but it does appear to be their ultimate use case.
and facilitate insider trading, like how do people miss that part
To say the purpose of a market is to reveal insider information is how you say insider trading is a good thing without saying insider trading is a good thing.
There's a ton of scholarly debate about it, and at least most of the early stuff was pretty earnest. But rather than the debate becoming more refined and nuanced over time it seems to have bifurcated along partisan (or partisan adjacent) lines like everything else, similar to the Keynesian/Misesian divide.
The proof that free markets are efficient (even in the narrow sense economists use this word) relies on an assumption of perfect information. This has been known at least since Akerlof.
The Misesian folks are a lost cause, IMHO. They're hardcore rationalists, self-indulging in circular moral arguments from assumptions that don't apply in the real world.
1 reply →