Price as Probability

In a Binary Market, a YES Event Contract pays $1.00 if the event occurs and $0.00 otherwise. A rational trader will pay at most their subjective probability for that share. If 1,000 traders each bring different private information and trade to profit, competition drives the Contract Price to the consensus probability. This is why a YES share trading at $0.72 is interpreted as the market assigning a 72% chance to the event. The complementary NO share trades at approximately $0.28, and the two sum to $1.00. The Information Aggregation function of prediction markets depends entirely on this price-probability equivalence: prices reveal beliefs because participants risk real money on them. No conversion formula is needed, unlike with sportsbook odds formats such as moneylines or decimal odds.

While price-as-probability is elegant, several real-world forces push prices away from true underlying probabilities. Overround (or Vig) causes the sum of all outcome prices to exceed $1.00, systematically compressing each Implied Probability. Longshot Bias leads traders to overprice rare events, making low-probability contracts trade higher than their true odds. Thin Liquidity and wide Bid-Ask Spread values create uncertainty about which price represents the true consensus. On platforms using an Automated Market Maker, the seeded prices may not yet reflect new information until traders push them. Despite these limitations, empirical Calibration studies consistently show that prediction market prices are among the most accurate publicly available probability estimates, outperforming polls and many expert forecasters.