[alun]

The actual economic theory behind prediction markets (if you read Robin Hanson's work, efficient market hypothesis, etc.) is that these markets work precisely because informed traders bring private information into the price. That's literally the core mechanism that underpins them.

Yes prediction markets represent "wisdom of crowd", and they do this by rewarding people who contribute correct information. So informed traders are the ones making the system work, and they're putting actual money on the line to back up their claim. Without them you're just left with uninformed guesses, which isn't really "wisdom of crowds", it's noise.

[kmaitreys]

Informed trader needs to be properly defined. Suppose a person just does some research at individual level (read, OSINT, make their own computer models to do prediction etc), then that's permissible.

But if you're defining an informed trader to already know the answer, then it's problematic. I hope you see that as well. The market should reward some logically deduced conclusion, not power. That's my position.

Also it's not noise, an average trader is not choosing a random number between (0,1). They can do research and their guess can be informed. Hence, the use of word wisdom. By your definition, this is gambling then.

[alun]

Yeah I think where we fundamentally disagree is what prediction markets should be optimizing for.

If the goal is to produce the most accurate forecast possible, then informed traders (especially asymmetrically informed traders) are a feature of the system, not a bug. The market is a system for discovering the truth, and it generally rewards whoever brings that truth to the table first.

If the goal is to create a fair playing field where the crowd collectively arrives at an answer, then yeah someone with private information becomes problematic.

But I'd argue that's optimizing for fairness at the cost of accuracy, and accuracy is much more important.