Predicting Resolution with Committees: Subjective Judgement and Risk Pricing

Executive Summary

In prediction markets, the role of committees for resolving ambiguous outcomes and the subjective judgment they entail is a critical factor affecting settlement risk and pricing. This post explores the mechanics of committee-based resolution predictions, the attendant risks, and how SettleRisk quantifies this risk for traders in platforms like Polymarket and Kalshi.

Core Concept

When outcomes in prediction markets are ambiguous, a committee is often tasked with resolving the dispute. The committee's decision-making process is inherently subjective, involving judgment calls on complex, multi-faceted issues. This subjectivity introduces resolution risk, which SettleRisk measures and prices.

Resolution Risk Quantification Formula: SettleRisk uses a deterministic, closed-form scoring system to evaluate resolution risk. The formula is as follows:

Resolution Risk Score = f(Subjective Factors, Committee Expertise, Market Dynamics)

where f denotes a function that incorporates the subjective factors, committee expertise, and market dynamics to produce a score indicating the likelihood of a dispute.

Worked Example

Let's consider a hypothetical market on Kalshi about a geopolitical event where the outcome is unclear. The market resolution hinges on the interpretation of a specific clause, which a committee must assess.

Step 1: Subjective Factors Analysis We identify subjective factors such as the clarity of the event's wording, historical precedents, and the potential for different interpretations.

Step 2: Committee Expertise Evaluation We assess the committee's background, expertise in the subject matter, and past decisions to gauge their likelihood of reaching a swift and clear resolution.

Step 3: Market Dynamics Review We review market dynamics such as trading volumes, open interest, and price volatility to understand how the market might react to different outcomes.

Example Code: Python SDK

from settlerisk import SettleRiskClient

# Initialize client
client = SettleRiskClient(api_key="your_api_key")

# Fetch risk score for a specific market
market_id = "Kalshi_Event_Market_ID"
risk_score = client.get_risk_score(market_id)

print(f"The resolution risk score for the market is: {risk_score}")

Example Code: TypeScript SDK

import { SettleRiskClient } from "settlerisk";

// Initialize client
const client = new SettleRiskClient({ apiKey: "your_api_key" });

// Fetch risk score for a specific market
const marketId = "Kalshi_Event_Market_ID";
client.getRiskScore(marketId).then(riskScore => {
  console.log(`The resolution risk score for the market is: ${riskScore}`);
});

Implementation Notes

When implementing SettleRisk's API, consider the following:

API Key Security: Ensure your API key is kept secure and not exposed in your code.
Error Handling: Implement robust error handling to deal with potential API downtime or data discrepancies.
Real-time Data: Utilize SettleRisk's webhooks for real-time risk score updates to stay ahead in volatile markets.

Failure Modes

Some common failure modes in subjective judgment-based resolution include:

Bias: Committee members may have personal biases that influence their decisions.
Lack of Expertise: Committees might lack the necessary expertise to accurately interpret complex clauses.
Influence Campaigns: External parties may attempt to sway committee decisions through influence campaigns.

Checklist

Assess Committee Composition: Evaluate the expertise and potential biases of committee members.
Monitor Market Sentiment: Keep a pulse on market sentiment to anticipate how different resolutions might affect prices.
Review Historical Resolutions: Study past resolutions by the committee to understand their decision-making patterns.
Stay Updated on Platform Rules: Regularly check for any changes in platform rules that might affect resolution processes.

Sources + Further Reading

For a deeper understanding of resolution risk and how it impacts prediction markets, refer to the following SettleRisk resources:

By understanding and quantifying the resolution risk associated with subjective judgment in committee-based predictions, traders can make more informed decisions and manage their exposure effectively.