One of the articles that I've had bookmarked for a while - I really should get around to finishing that -- is this one, about a fellow at Wharton, an economist, who studies prediction markets. It's not particularly long, I just kept finding other things I wanted to read, too. But today I finally did -- the bookmark list was getting unmanagable - though did you see this article about making soft pretzels? -- and upon reading it, I ended up with a question.
Here's the relevant part of the article:
He takes a sip of red wine and asks his guest, “Would you bet me five dollars I’m wearing red underwear? No, you wouldn’t. Why not? Because you know I have better information than you do.” His point is that smart people with good information are attracted to markets by the existence of ignorant bettors.
I think what does it matter if you have knowledge of the state of the thing that you're offering a bet on, and I don't? Its possible that the state encourages the offering of the bet -- ie, if I know something is so unlikely to engender a bet, I just won't offer it -- and maybe knowledge affects the size of the bet -- I'll bet you ten thousand dollars vs I'll bet you ten cents -- but other than that, whats the point? I could still bet even if I was sure you knew what color underwear you're wearing. I'm not betting on your knowledge, I'm betting on the likelihood of the event, or on my ability to guess.
Got to admit, this feels like the Monte Hall question, which I still don't agree with. So maybe -- am I missing something here?
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