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Can Interest-Bearing Positions Solve the Long-Horizon Problem in Prediction Markets?

Caleb Maresca

Abstract

Prediction markets suffer from reduced liquidity and price accuracy for long-horizon events due to the opportunity cost of committed capital. Recently, major platforms have introduced interest-bearing positions to mitigate this "long-horizon problem." I evaluate this policy using agent-based simulations with large language model (LLM) traders in a 2 x 2 factorial design, varying time horizon (4 days vs. 2 years) and the presence of interest. While long horizons degrade accuracy, the observed pricing bias (0.72 percentage points) is significantly smaller than theoretical and prior empirical estimates. Paying interest eliminates approximately 83% of the horizon effect on accuracy and more than triples market participation (from 17% to 62% of wealth). These findings suggest the long-horizon problem may be overstated in existing literature and that interest-bearing positions are a highly effective intervention, primarily by incentivizing participation rather than correcting bias.

Can Interest-Bearing Positions Solve the Long-Horizon Problem in Prediction Markets?

Abstract

Prediction markets suffer from reduced liquidity and price accuracy for long-horizon events due to the opportunity cost of committed capital. Recently, major platforms have introduced interest-bearing positions to mitigate this "long-horizon problem." I evaluate this policy using agent-based simulations with large language model (LLM) traders in a 2 x 2 factorial design, varying time horizon (4 days vs. 2 years) and the presence of interest. While long horizons degrade accuracy, the observed pricing bias (0.72 percentage points) is significantly smaller than theoretical and prior empirical estimates. Paying interest eliminates approximately 83% of the horizon effect on accuracy and more than triples market participation (from 17% to 62% of wealth). These findings suggest the long-horizon problem may be overstated in existing literature and that interest-bearing positions are a highly effective intervention, primarily by incentivizing participation rather than correcting bias.
Paper Structure (33 sections, 7 equations, 8 figures, 13 tables)

This paper contains 33 sections, 7 equations, 8 figures, 13 tables.

Table of Contents

  1. Introduction
  2. Literature Review
  3. Prediction Market Accuracy and Information Aggregation
  4. The Long-Horizon Problem
  5. Laboratory Prediction Market Experiments
  6. Large Language Models in Experimental Economics
  7. Experimental Design
  8. Experiment Structure
  9. Participant Design
  10. Treatments
  11. Hypotheses
  12. Hypothesis 1: The Long-Horizon Effect
  13. Hypothesis 2: The Effect of Portfolio Value Interest
  14. Results
  15. Overview
  16. ...and 18 more sections

Figures (8)

  • Figure 1: Experiment Timeline
  • Figure 2: Price Accuracy Measures by Treatment
  • Figure 3: Price Deviation from True Probability by Round
  • Figure 4: Belief-Price Gap by Round
  • Figure 5: Prediction Market Exposure by Round
  • ...and 3 more figures