Implied Probability

In a Binary Market, each YES contract pays $1.00 if the event occurs and $0.00 if it does not. Because the payout is fixed at one dollar, the Contract Price directly encodes the crowd's consensus probability. A contract trading at $0.72 means rational traders believe the event has roughly a 72% chance of happening. This Price as Probability relationship is fundamental to how Prediction Market venues like Kalshi and Polymarket communicate forecasts. When new information arrives, traders buy or sell contracts to reflect updated beliefs, and the price adjusts in real time. The resulting implied probability aggregates dispersed private information across all market participants, making prediction markets useful forecasting tools beyond pure speculation.

Implied probability is the market's best estimate, not a guarantee of accuracy. Several forces can push market prices away from true underlying probabilities. Overround (also called Vig) is built into many platforms, causing YES and NO prices to sum to more than $1.00 and systematically understating each outcome's implied probability. Longshot Bias causes low-probability events to be overpriced, meaning a 5-cent contract may actually reflect a true probability below 5%. Calibration studies measure how often prediction markets get the odds right on average. Skilled traders exploit gaps between implied and true probability by finding Mispricing, while Information Aggregation theory suggests well-functioning markets self-correct these gaps over time.