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A RECENT EMAIL BLAST FROM XPREE, a prediction market startup:In an effort to make truly Usable Markets, we changed from a "stock trading" metaphor to a "betting" metaphor. In research, we found that players found shorting stock to be a lot less intuitive than going long, this may explain the optimism bias in the Google results. [Emphasis mine] I agree that using terminology from sports betting is easier than financial market lingo. The language of betting might raise the eyebrows of corporate lawyers a bit more -- but if you can assuage them, its better.
I don't think that short-aversion explains the optimistic bias revealed in the Google markets. Because of the IEM-like structure of the markets, no shorting was necessary to make a pessimistic bet. If you wanted to bet pessimistically, you could simply buy the pessimistic outcome.
In other words: The optimistic bias was not only saw an aversion to shorting optimistic outcomes. It was also an aversion to buying pessimistic ones.
We did observe a general aversion to shorting, which is bad for the market's efficiency and accuracy. Better terminology could overcome this. More on these two biases in a forthcoming post.
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