The fact that pay-outs are limited to the amount spent to purchase claims is integral to the institution of prediction markets. If market operators ever pay off both sides of a claim, that is likely to encourage investors to protest many more close calls.
I disagree. Having pay-outs equal to claim purchases is integral to the normal function of well-written claims, but there’s little reason to stick to that rule with a claim written as poorly as the North Korean missile claim was.
Paying off both sides was the most reasonable suggestion I’ve heard for what Tradesports should have done to limit the damage to their reputation. Experience with similar disputes (such as those on FX) suggests that traders already have sufficient motive to protest questionable decisions that it’s hard to see how disputes produced only by additional incentives could bear much resemblance to reasonable disputes. The increased incentive on Tradesports to word their claims so that fewer people misunderstand how they will be judged is likely to have some desirable effects on how Tradesports explains the meaning of their contracts.
Disputed judgments might be inevitable for exchanges that cover subjects as ambitious as Tradesports does, but there’s nothing inevitable about confusion about whether a contract was about DoD confirmation of where the missiles landed, or whether it was about what the missiles did, with DoD statements merely being used if needed to resolve any uncertainty.
(I didn’t trade any of the North Korean missile contracts).