(Disclaimers: I work in the financial industry, though not in a way related to prediction markets. Anything I write here is my opinion and not that of my employer.
This is a US-centric piece based on a case study of PredictIt: as some people have pointed out in the comments below, if you are outside the US you may have substantially better options.)

SECTION I: INTRODUCTION

So there's an argument that I've seen a lot over the past few years, particularly in LW-adjacent circles, that goes something like this:

You say you believe X is likely to happen. But prediction markets say X is likely not to happen. Since markets are efficient, you must be wrong. Or if you do know better than the market, why aren't you rich? Since you haven't bet on that market to make free money, you must be lying. Or stupid. Or both!

This post is dedicated to disagreeing with that argument, not from an anti-Efficient-Market Hypothesis position, but from a pro-Efficient-Market Hypothesis position. My position is:

The argument above is pretty much sound if we are discussing mainstream financial markets. If someone claims to have better information than a mainstream financial market on the value of Google stock, or of copper, they ought to either use this knowledge to make a huge amount of money or stop talking about it. However, it is not true if we are discussing prediction markets. Current prediction markets are so bad in so many different ways that it simply is not surprising for people to know better than them, and it often is not possible for people to make money from knowing better.

I've been meaning to write this for a while, but got tipped over the edge by the recent post here, which talks about the limitation of prediction markets being the correlation of the events they predict to other assets, and their consequent value as hedging instruments. That is...well...it's not wrong exactly, but there are so many other problems that are so much bigger that I felt it was worth laying (some of) them out.

Math follows. I will be focusing on PredictIt for this analysis. Other prediction markets may work a bit differently, but similar analysis is applicable to any of them. If you think the math is wrong I am happy to discuss/make changes, but I very much doubt any changes will materially alter the final message.

As of this writing PredictIt has ...