skininthegame

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.

Working on /roam: the social onchain browser. Download the app at roam.xyz.

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.

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.

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.

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

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).