If you have a prediction market on a prediction market, that mess reduces to a prediction market. Quelle surprise!
Are you assuming that prediction markets are only over stock prices? What about a market about the winner of the next US presidential election?
IIRC, those exist, were the focus of attention a few cycles back (because cherry picked just right they were arguably better than polling in the cycle preceding the attention), but as soon as media started paying attention to them, people started diverting money to them to manipulate the results, because there are plenty of people that care more about influencing the result of that question (and it's one where perceived likelihood influences the actual behavior that controls the result) more than predicting it.
That kind of thing is actually a significant problem in many of the areas where prediction markets have been hyped.
What's the evidence for people putting in large amounts of money to influence betting on elections?
Isn't it making a bit assumption that people vote in a certain way because they see things in prediction markets?
Regular people are surely not checking odds on who is likely to win an election.
Going back and reviewing things it seems my memory was wrong: the risk of coordinated efforts of this type if the prediction markets became seen as strong bellwethers of electoral success was discussed in the wake of some isolated, apparently single-trader incidents that momentarily moved the prediction markets in 2004 and again in 2008, but there doesn't appear to have been any detected widespread manipulation.
> Isn't it making a bit assumption that people vote in a certain way because they see things in prediction markets?
No, there's a pretty strong well-known effect that media coverage of electoral momentum reinforces that momentum; it's not doing much changing cited as impacting enthusiasm and turnout.
> Regular people are surely not checking odds on who is likely to win an election.
People—especially the people who are reasonably likely to vote—to consume political news, including news relating to whatever the media sees as strong horserace indicators. For a few cycles startibg around 2000 that had started including prediction markets, though it seems to have faded the last couple cycles.
see the problem?
"How long would it be before you saw traders investing in a way that would bring about the desired result?"
As in, if one found a way to bet against your car remaining in tact and realized sabotaging your car was cost effective to manipulate their bet, then they reap the market pay out. Is this good?
https://en.wikipedia.org/wiki/Information_Awareness_Office#F...
You just described insurance fraud. And just like in insurance, the fix is to be very careful about how you describe the "win" condition—not just "will the car become damaged" but "will the car become damaged through no fault of the owner" (to begin with; the actual terms would be much more complex).
Incentives in smaller markets (e.g. local elections, or personal car crashes as you say) are super interesting though.
I'm admittedly naive in this subject, but the name calling doesn't help.
On the second point - there is solid evidence that, yes there are ways to pick stock besides JUST analyzing the company - see Momentum investing https://www.aqr.com/Insights/Research/Journal-Article/Fact-F...
I've seen plenty of critics of the efficient market hypothesis, and Fama himself has said that the market is not efficient.
the academic consensus is that as soon as you create a second incentive (the prediction market itself) you lose all the insight you could gain from external factors. At that point they are no better than simply looking at the stocks (the predicted market). hence prediction markets are by definition, useless.
the cristall ball people still trying to make it happen are now trying to see how much they can limit the prediction market itself for it to not affect itself (hence the limitations you don't like on the one you mention)