### Discounting and prediction market prices

The prolific Alex Forshaw asks why 2008.GOP.NOM.HUCKABEE trades above 7. But should you sell even an

Discounting returns may not bias prices for a number of reasons, including de-biasing by large interest-earning accounts, a short average trade horizon, and gamblers' "irrationality". Insofar as rates (and commissions) are found to affect prediction market prices, then perhaps an "implied probability" or "delta" metric to supplement price is inevitable. In that case, if we interpret price as probability, then the price will be biased, but only because of our interpretation.

*impossible*event for less than 100-(100/((1+(r-r_{m}))^T)+ c? Here, T is the years to expiration, r the risk-free rate, r_{m}the yield on your margin (which is zero for most Intrade traders), and c is the trading fee, which is currently less than or equal to 0.5 + 1/(1+r)^T (a 0.5% price-taker's entry fee plus the present value of the 1% in-the-money fee). The price of 2008.GOP.NOM.HUCKABEE seems more reasonable with this is mind, but traders are only interested in selling the whole set of possibilities for more than 100*(1+(r-r_{m}))^T + Σc, or buying them for less than 100/(1+(r-r_{m}))^T - Σc. This will mitigate any discounting "bias". (Play-money markets also have a discount rate, but it is logically and empirically much less. Play-money markets also show some evidence of yield curve inversion.)Discounting returns may not bias prices for a number of reasons, including de-biasing by large interest-earning accounts, a short average trade horizon, and gamblers' "irrationality". Insofar as rates (and commissions) are found to affect prediction market prices, then perhaps an "implied probability" or "delta" metric to supplement price is inevitable. In that case, if we interpret price as probability, then the price will be biased, but only because of our interpretation.