Longshot Bias

Longshot bias is one of the most robust findings in market research and persists even in liquid, well-traded markets. The behavioral finance explanation draws on prospect theory: people do not process probabilities linearly, tending to perceive a 2% chance as feeling more like 5%. This overweighting of small probabilities combines with the psychological appeal of a large payoff from a cheap contract. A $0.03 contract that could pay $1.00 feels like a lottery ticket, and lottery-style gambles attract demand that pushes prices above fair value. Research on Kalshi markets has confirmed a strong favorite-longshot bias, with high-probability events systematically underpriced and low-probability events systematically overpriced relative to Calibration benchmarks.

Awareness of longshot bias suggests two actionable approaches. First, avoid buying contracts priced below roughly $0.10 unless your independent probability estimate is confidently higher than the market price, since the base expectation is that such contracts are already overpriced. Second, consider buying NO on heavily overpriced longshot contracts as a systematic fade strategy. This is a form of Value Betting that exploits a known structural Mispricing rather than a one-off information advantage. The key discipline is sizing positions using the Kelly Criterion rather than betting flat amounts, since the edge on any individual NO contract may be small even if the directional expectation is correct. Track results over a large sample to confirm whether the bias is genuinely present in the specific markets you trade.