bettingmarket

Every action/bet is predicated upon a belief of sorts. A belief is essentially an assertion of faith in ones own proposition based on the available evidence (The amount I am willing to bet signals the extent of my faith in my own belief). The problem with beliefs is that very often they are simply nothing more than compensatory gestures, hobbled together in response to signal extraction problems under conditions of uncertainty and purely designed to reduce uncertainty, ambiguity and confusion. (knowledge stability temporarily serves to down-regulate stress). The stronger that the belief is held onto the less likely one is to update it in the light of conflicting evidence (delusions are impervious to new evidence). People have faith in their own bullshit - they are too sure that they are right - when in fact, more often than not, they are guilty of attaching significance to things that simply have no significance (inappropriate salience is assigned to (benign) external stimuli that then crystalise and drive goal directed action). Sometimes they get lucky.

Highly evaluative, emotionally charged beliefs about something evoke strong feelings, and these tend to elicit a search for supporting beliefs. People that believe what you believe are seen as being more sincere and competent - the Matt Chapman Effect - so we go in search of them (suboptimal verificationist strategies). It should not be forgotten that often people simply cannot be bothered to monitor their own decision-making processes. They arrive at conclusions but they don't know how they got there and they don't really care. They essentially remain ignorant of their own ignornace.

The participants in a betting market act on the basis of rational expectations, but on the basis of intersubjective expectations. That is traders look to one another for signals regarding how to react to the events that are taking place within the betting market. This leads to herding and information cascades, but also to increased variability, which occurs when intersubjectively shared beliefs are suddenly upended, and the betting market is forced to adjust towards a new equilibrium (Think Trump/Biden when Trump won Florida - Think Southfield Harvest below).

To believe something is to believe that it is true. So a trader believes that all his/her beliefs about an event outcome are true - otherwise why would he bother to trade. But experience has taught him that some of his beliefs will be wrong. So a so-called rational trader believes that every one of his/her beliefs are true and yet he knows that some of them are false. That is the paradox. If we were to stop and to think about it, we would spend a little bit more time working out where our beliefs actually come from. And then, we might even be able to update them, in the light of new evidence. Sometimes we might even be able to change our minds - but that is a story for another day.

Show me a man who claims he is objective and I'll show you a man with illusions. Henry R. Luce