Who Is On the Other Side?

Making money in markets requires having a point of view that is different than what the current pricesuggests. Michael Steinhardt called this a “variant perception.”13 Most investors fail to distinguish betweenfundamentals and expectations. When fundamentals are good they want to buy and when they are poorthey want to sell. But great investors alwa... See more

In a prediction market, it is relatively more difficult: maybe you are trading with someone who has natural exposure to a Russian invasion and is just looking for a hedge, but more likely your counterparty is, like, a guy who speaks Russian and is in dozens of Telegram groups waiting for just the right moment to trade against your resting order.

Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them. But when you don’t know why someone behaves like they do you won’t know how long they’ll continue acting that way, what will make them change their mind, or whether they’ll ever learn their lesson.

Economics 101 teaches that trading is rational only when it makes both parties better off. A baseball team with two good shortstops but no pitching trades one of them to a team with plenty of good arms but a shortstop who’s batting .190. Or an investor who is getting ready to retire cashes out her stocks and trades them to another investor who is j

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