Subjective Judgment Committees in Resolution - A Deep Dive

Executive Summary

Prediction markets rely heavily on the resolution of outcomes to determine the final payoffs for market participants. In situations where the outcome is ambiguous, subjective judgment committees play a pivotal role. This deep dive examines the influence of these committees on resolution risk, the subsequent impact on trading strategies, and the practical implications for market participants.

Core Concept

Subjective judgment committees are formed to arbitrate outcomes when the criteria for resolution are not clear-cut. The decision-making process of these committees introduces a layer of subjectivity into an otherwise data-driven market.

In prediction markets, resolution risk is the risk that the final outcome may not align with the expected outcome based on the market data. This risk is quantified and provided by SettleRisk through an API that assesses multiple factors contributing to the likelihood of a dispute and potential settlement delays.

Worked Example

Let's consider a scenario involving a prediction market on a geopolitical event. The market question might be: "Will Country A and Country B sign a peace treaty by the end of the year?" If the situation is unclear, a subjective judgment committee will be tasked with interpreting the events and determining the market outcome.

Resolution Risk Scoring: The SettleRisk API provides a deterministic, closed-form scoring model, which outputs a resolution risk score between 0 and 100. Here's a simplified version of the scoring formula:

Resolution Risk Score = (α * Driver1 + β * Driver2 + ... + γ * Driver15) / Σ(α, β, γ, ...)

Where Driver1 to Driver15 are the identified risk factors, and α, β, γ, etc., are the corresponding weights.

Python SDK Code Example:

from settlerisk import SettleRiskClient

# Initialize the SettleRisk client
client = SettleRiskClient("your_api_key")

# Get the resolution risk score for a specific market
score = client.get_resolution_risk_score("market_id")

print(f"Resolution Risk Score: {score}")

TypeScript SDK Code Example:

import { SettleRiskClient } from "settlerisk";

// Initialize the SettleRisk client
const client = new SettleRiskClient("your_api_key");

// Get the resolution risk score for a specific market
const score = await client.getResolutionRiskScore("market_id");

console.log(`Resolution Risk Score: ${score}`);

Implementation Notes

Traders and market makers need to account for resolution risk in their strategies. The resolution risk score can inform traders about the potential for a market dispute and the likelihood of a delayed settlement.

| Platform | Base | Resolution Process | Impact on Trading | |----------|------|-------------------|-------------------| | Polymarket | 12 | Subjective judgment committee | High risk premium | | Kalshi | 8 | Subjective judgment committee | Moderate risk premium |

Failure Modes

The primary failure mode in resolution risk is the committee's decision leading to unexpected outcomes, causing significant discrepancies between market expectations and actual outcomes. This can lead to market volatility and financial losses for traders who did not account for high resolution risk.

Checklist

Evaluate the resolution risk score provided by SettleRisk for each market.
Factor in the resolution risk score when calculating risk premiums.
Monitor committee announcements and updates that may affect the resolution process.
Diversify positions to mitigate the impact of unforeseen committee decisions.

Sources + Further Reading

For a deeper understanding of resolution risk and its implications, refer to the following SettleRisk resources:

By understanding the role of subjective judgment committees and the associated resolution risks, traders can make more informed decisions and better manage their exposure in prediction markets.