Can someone please explain to me why I see a prediction like "Who will win the 2016 Democratic presidential nomination?" and then find that you can bet on Jerry Brown winning for 5¢, even though it's quite improbable, and it's the same with Bill de Blasio, and Al Gore?
Now since you'll get 95¢ on the dollar if you vote no (which is the almost guaranteed outcome), couldn't you just put the maximum bet down (not sure how much that is yet), and have a pretty sure way of wining some money that way?
In other words, i'm wondering why everyone isn't voting no on Brown, and who in the world is voting yes.
A good question. A prediction against Brown should earn you 5c, but you won't know for sure until November 2016, and meanwhile that 95c is tied up and can't be used for any other predictions.
Meanwhile, when November 2016 comes around, you will collect your 5c per dollar, then have to pay 5% processing back to Predictit to get your money transferred back. Not a great value proposition, at best you are about flat and have tied up your money all year. Meanwhile your counterparty who buys Brown at 5 cents, might quickly double their money if/when Brown speculation starts up. Sell at 10c for a quick double. Therefore, Buy Brown 2016! (I kid but its not as crazy as it sounds)
It's because people are trying to take advantages of small changes in probabilities, not because they are actually banking on Jerry Brown winning.
For example, let's say you have $1 and two options:
1) Buy one $0.95 "yes" share or
2) Buy 20 "no" shares worth $0.05 each, for a total of $1
Let's say you choose option (1) and the event comes true. Great -- your net gain is $0.05.
Let's say you choose option (2), but you don't wait until the event is determined -- rather, you sell your shares when there's a small increase in probability. So let's say shares start selling at $0.06 and you sell all of your shares. Well, you just made 20 * $0.01 = $0.20. That's 4x as much as you would have made if you chose option 1.
You'll get 5 cents on your 95 cent bet if you pick "no" and win. That's a 5.26% return. Not too exciting. Betting "yes" on the other hand, would net you 1900% if you won. That's a little more exciting. And it's cheap. So you'll always find people willing to throw out a few pennies for the off chance that they're actually right. Same reason you see people playing the lottery day in and day out.
Also, the max bet is $850 per market. So you could buy 17,000 shares of a 5-cent pick, and therefore would stand to gain a potential $16,150 before fees.
I'm guessing a lot of this has to do with the huge margin requirements of voting "no" on many of these propositions. Oftentimes these markets are .95/.98 and it doesn't make much sense to lend .98 to some company in New Zealand for a year to get back 1.00 at the end (less fees). I could just buy a treasury bond for that price...
It seems more feasible to me now, to deal in those minor fluctuations, while knowing that the prediction has almost zero chance of becoming true. To be honest, the way i've seen any sort of substantial increase in value of my shares so far on PredictIt, has been by betting on what i know not to be true, and collecting on that short-term wave of speculation instead (Insert Trump here).
I feel like I have a better understanding of what shorting is now. Without the margin trading part, this approach is conceptually close to it. Thanks everyone!