Astral Codex Ten

Goldman Sachs

12 min read

Goldman Sachs

Article

Goldman Sachs is a recurring organization in the Astral Codex Ten archive, appearing 3 times across 3 issues between October 19, 2022 and January 30, 2024. The archive places it in contexts such as “We’re thinking we’ll approach Goldman Sachs first”; “some trader at Goldman Sachs who has a complicated proprietary algorithm”; “If no individual rich person does it, Goldman Sachs will definitely do it”. It most often appears alongside Google, Manifold, Metaculus.

Metadata

  • Category: Organizations
  • Mention count: 3
  • Issue count: 3
  • First seen: October 19, 2022
  • Last seen: January 30, 2024

Appears In

Source Context

Recovered passages from the original issue text. When the raw archive preserved outbound links inside the source passage, they are listed directly under the quote.

Another Bay Area House Party
October 19, 2022 · Original source
“Oh yeah,” said Bob. “We’re thinking we’ll approach Goldman Sachs first. Their CEO is a DJ himself, so it’ll be an easy sell.”
Prediction Market FAQ
December 20, 2022 · Original source
In the real stock market, to a first approximation the answer is no. The first person to notice will be some trader at Goldman Sachs who has a complicated proprietary algorithm that watches 24/7 for the moment a $100 bill falls on the ground, then snaps it up within a millisecond of finding it. Unless you’re also an expert who spends all your time looking for mispricings, that guy will probably find them before you.
If we try this plan, then looking back on it ten years from now, will we agree it was a mistake? Prediction markets give us a way to get accurate and canonical answers to questions like these, and to short circuit the usual discussions about how biased different information sources are. See below for some clever, more exotic ways we can use prediction markets. 4. What are the most common objections to prediction markets? These are various objections, some wrongheaded, some true but nonfatal. There are many of them, making this section very long - you might want to skip over any objections you’re not worried about. 4.1: Would prediction markets be ruined by insider trading? That is, suppose there is a market on whether President Biden will resign before the end of his term. President Biden has special knowledge of this, so he could bet on the true outcome and make a lot of money unfairly. He could even change his behavior (eg resign at an unexpected time) just to make more money. Isn’t this unfair? One answer is that normal markets (eg the stock market) face these same problems, but manage them by making insider trading illegal. These laws don’t always work perfectly, but they work well enough that most people are happy to buy stocks. Another answer is that, while this is bad for other investors, it’s not bad for the accuracy of prediction markets, or their use in creating unbiased social consensuses. In fact, knowing that President Biden is insider-trading on a “Will President Biden resign?” prediction market should only increase your confidence in it getting the right answer! This is slightly too rosy, because if insider trading is bad enough for other investors, they might just not trade. This would be a partial effect: investors would be willing to overcome their fear for a big enough payday, meaning that concerns about insider trading probably would increase the likelihood of persistent small mispricings while still not allowing bigger ones (with the exact size depending on how frequent the insider trading was). It’s unclear whether this negative effect would be bigger or smaller than the positive effect from insiders having more information, so in different situations the market might end up either more or less accurate. Overall, economists are split on whether insider trading makes markets more or less accurate. Commodities markets don’t really have insider trading laws right now, and seem to be about as accurate as anything else. I hope prediction markets will experiment with different insider trading rules, and the ones that best satisfy all participants and create the most accurate results will win out. If for some reason this doesn’t work, I don’t expect it to make too much difference either way. 4.2: Would prediction markets encourage harmful or illegal activities? What about the risk of insider trading by committing harmful / illegal acts? That is, could President Biden’s doctor decide to poison him, then make money when he has to resign due to ill health? I think the strongest evidence against is that this basically never happens in stock markets. Tesla stock would plummet if Elon Musk died or resigned, but nobody realistically worries that Musk’s doctor will short Tesla and poison him. Lots of corporations’ stocks would sink to zero if you burned down their offices and factories, but nobody shorts them and then commits arson. Probably this is because there are laws against doing harmful and illegal things, and people have decided that stock market gains aren’t worth breaking the law and getting punished. Since prediction markets have only a tiny fraction of the amount of money that stock markets do, probably people won’t consider it worthwhile to commit harmful actions to manipulate them either. If you were going to murder someone to profit off a market, who would you rather kill: a US politician (the PredictIt market on the presidential election has a volume of about $600,000)? Or a Fortune 500 CEO (whose companies might have market caps in the hundreds of billions)? 4.2.1: What about prediction markets in very specific harmful or illegal activities? I guess if you created a market in “Will someone burn down the 7-11 on Main Street tomorrow at 3:32 AM?”, then bet a lot of money, then did it, that would be bad. I think realistically nobody would bet against you on that. But probably prediction markets should avoid hosting markets on these very specific bad things, just to make sure. 4.3: Would prediction markets give rich people more power? That is, suppose we used prediction markets to assess socially important questions like “will the climate change by such-and-such a number of degrees by 2030?” It would be bad if rich people could manipulate our social consensus on this. But you move prediction markets by buying shares, and rich people can afford more shares than poor people. So doesn’t this mean that rich people can manipulate how concerned we are by global warming? No. See 3.2 for the general reasons why it’s very difficult or impossible to successfully manipulate a prediction market. These reasons apply to rich people too. Suppose a rich person spent $100 million to buy NO shares in “will the climate be warmer in 2030 than today?”, pushing the market’s implicit chance of global warming down to 1%. That means if there is global warming, you could multiply your money by 100x by buying YES. I would immediately invest $10,000 in this market, so that I could get $1 million back in 2030 and retire rich. My $10,000 isn’t going to be enough to fully move this market all the way back - we already said the rich person spent $100 million manipulating it. But “you can get a free $1 million quickly with no downside at an evil rich person’s expense by correcting an obvious misconception about global warming” sounds like the sort of thing that could make it to the front page of Reddit (to put it lightly). I think more than enough people would learn about this to fully correct the mispricing. Is there any amount of money that could successfully manipulate a market? I think the answer is that you need to have more money than the sum total owned by everybody else in the world who wants to make $1 million quick. And at the limit, there’s always Goldman Sachs - who watch financial markets very closely, definitely want to make $1 million quick, and have a lot of money. So I think the most honest answer to this objection is: if you are an evil rich person reading this FAQ, then it will definitely work for you. Please sink $100 million into reducing a prediction market’s chance of global warming to 1%. And make sure you tell me first, so that I can fully marvel at your evil genius. This will work great for you and nothing will possibly go wrong. 4.3.1: But wouldn’t the subtle biases of rich people (which they might genuinely believe) still affect the market more, since they have more money? No. See 3.3 for the general reasons why we should expect prediction markets to be free from subtle biases which people genuinely believe. These reasons apply to rich people too. Suppose rich people have subtle biases which make them wrong more often than poor people. And suppose rich people (wrongly) believe global warming is 75% likely, but poor people (correctly) believe it’s 99% likely. This just reduces to the Nate Silver situation earlier, with poor people playing Nate Silver. The aggregated opinion of poor people is “an expert” which is right more often than the markets. It’s easy for someone to notice this and get rich quick (in expectation) by betting on what poor people think. Since lots of people can easily notice this and want to get rich quick, eventually they will correct the mispricing. Even if rich people have so much more money than poor people that no group of poor people, however large, can ever correct a rich person mispricing, eventually some smart rich person will hit upon this strategy themselves. If no individual rich person does it, Goldman Sachs will definitely do it. 4.3.1.1: What if both rich people and poor people have biases, and neither one is consistently more right than the other? Won’t the market still reflect rich people’s biases rather than poor people’s? Not if it’s possible for anybody to notice these biases and correct for them. Treating the aggregate opinion of poor people as an expert was just one example. If the winning strategy is something like “trust rich people on financial questions, poor people on environmental questions, and the point exactly halfway between them on social questions”, then whoever discovers that strategy can get rich quick. The more often people use prediction markets, the easier it should be to detect strategies like these. 4.4: Aren’t prediction markets worse than superforecasting? “Superforecasting” refers to a variety of forecasting methods similar to those pioneered by Philip Tetlock and the Good Judgment Project. Typically, they would do something like: Ask many smart people to give probabilistic answers to a very well-specified question
Inline links: economists are split
Operate using play-money only. Here Manifold is the leader. You could also think of superforecasting tournaments like Metaculus as a version of this. I claim that the main reason prediction markets haven’t fulfilled their potential and become a major pillar of worldwide decision-making is that none of these solutions are really adequate. For whatever reason, most people interested in prediction markets are American, so Polymarket has a limited userbase. The regulators are pretty harsh, so the companies that strike deals to get exemptions usually have to trade away most of their functionality. Kalshi can only ask a few specific regulator-approved questions; the limits are so harsh that they’re not even allowed to predict elections. Play-money prediction markets like Manifold are a lot of fun, but there’s a limit to how much work people will do to earn play money. I want a world where the people who are best at correcting mispricings in prediction markets can make full-time jobs out of it, and where there are prediction market equivalents of Goldman Sachs where hundreds of brilliant people work together with cut-throat efficiency to find mispricings the moment they appear. Play money won’t get us there. Real money prediction markets tend to have between four- and six-digit (very occasionally seven-digit) volumes on most questions. Play money prediction markets have between one- and four-digit numbers of traders on most questions. Most big prediction markets are usually within 10% of each other and the best outside experts, but not always within 1%. Traditional financial markets are usually within 1% of each other, so I think this is because the prediction markets are still too small to have sub-1% accuracy. I hope that as they grow bigger they can reach this milestone. 7. What can I do to help promote prediction markets? If you’re an ordinary person with no special expertise or skills, I think the best thing you can do is create a Manifold Markets account, bet on topics that are interesting to you, and create markets for any interesting topics that don’t have one yet. I think this could be helpful for a few reasons: It’s hard to really understand prediction markets until you’ve played a few yourself.
Inline links: Manifold, Metaculus
24
January 30, 2024 · Original source
Johnson makes a pretty reasonable guess about the cause: lots of dumb money. People use their pocketbooks to root for their favorite candidate. Normally in a functioning market smart money would take the other side and set the final price, but the high transaction costs, long waits, and regulatory limits on prediction markets mean it’s not generally worth smart money’s time to correct the mispricing; Goldman Sachs isn’t going to hire statistics PhDs to make a model just so they can bet $850 on PredictIt.