Mispricing

Mispricings fall into two broad categories: structural and episodic. Structural mispricings are systematic distortions caused by predictable human biases. Longshot Bias is the most documented: contracts on events with true probabilities below roughly 10% are persistently overpriced because traders overweight the excitement of a large potential return. Favorites, by contrast, tend to be underpriced. Anchoring to round numbers like $0.50 can also produce small but exploitable gaps. Episodic mispricings emerge when breaking news affects an outcome but market participants are slow to update, or when a single large trader moves a thin Order Book away from fair value. Both types require a reliable independent estimate of true probability to distinguish a genuine mispricing from a contract that is fairly valued at a price you dislike.

Exploiting a mispricing requires three conditions: your probability estimate is more accurate than the market, the size of the deviation exceeds Trading Fees and Bid-Ask Spread, and you can execute at or near the current price before it corrects. Position sizing via the Kelly Criterion ensures you commit capital proportional to the estimated edge rather than betting a fixed amount regardless of confidence level. Line Shopping across multiple platforms helps confirm whether the apparent mispricing is unique to one venue or reflects a genuine market-wide inefficiency. Keeping accurate records of identified mispricings and outcomes is the only reliable way to determine whether your edge is real or the product of small-sample variance.