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Xen Baynham-Herd
@xenbh.eth
Why I’m interested in prediction markets I spent 8 years as a derivatives trader. Derivatives can be used to take risk, but they are mainly used to manage risk. Investment banks use derivatives to hedge all kinds of risk. Yet, ordinary people don’t have access to these sorts of risk management tools.
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Xen Baynham-Herd
@xenbh.eth
On a size-adjusted basis, individuals often take on way more financial risk than any investment bank or hedge fund would. Think about how much risk an individual takes on when they buy a home with a huge mortgage - they become extremely exposed to local property prices.
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Xen Baynham-Herd
@xenbh.eth
Or similarly with currency - a bank with international expenditures would never keep all their assets in one local currency - yet most people have their entire net-worth denominated in their home country’s currency (often with life devastating consequences).
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Xen Baynham-Herd
@xenbh.eth
Economists have come up with ideas for how derivative tools could be created to widen access to risk management, but to date none of these really worked in practice. For example, Robert Shiller’s book: The New Financial Order - Risk in the 21st C, has some good ideas, but no one was able to bring them to market.
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Xen Baynham-Herd
@xenbh.eth
I have a hunch and a hope that prediction markets will be able to widen access to financial risk management and help exposed individuals and families manage their financial risk.
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Xen Baynham-Herd
@xenbh.eth
Examples: - Go long/short specific real estate portfolios to hedge exposure to a neighborhood or city - Structures indexed to the average salaries of certain professions to hedge earning risk - Synthetic exposure to the real GDP growth of a country. Would love to see examples of these coming to market one day
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mla
@mla
Super interesting! Prediction markets, as far as I have seen them implemented, lead to binary outcomes so I am not sure if these are best examples (?). What you are depicting here is some sort of hybrid between (macro) index investment products and bespoke structured products to get the required synthetic exposure.
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