Why do prediction markets sometimes look “wrong,” even when they’re popular?
Markets can be “wrong” due to new information not yet absorbed, biased participation, or structural frictions like low liquidity and fees. The displayed price is a tradeable consensus—not a guarantee of accuracy.
Detailed Explanation
- Information delay: crowd updates after news diffuses, not instantly.
- Participation bias: traders may skew toward certain narratives.
- Structural frictions: spreads, position limits, and fees can prevent arbitrage from correcting price.
- Resolution ambiguity: uncertainty about how the contract will settle can depress price even if the outcome seems likely.
- Why this exists: The market reflects who is trading and how easy it is to trade, not just truth.
Common Scenarios
- A viral headline drives a price spike that later mean-reverts
- A niche market is dominated by a small group
- A market price lags behind a fast-moving data release
- A contract has confusing settlement criteria
Exceptions & Edge Cases
- If the market is deep and active, then mispricings usually close faster.
- If a market is mostly used for hedging, then price may embed risk premium (not pure probability).
- If resolution is subjective, then “right answer” is the rules, not reality.
Practical Examples
- Market implies 80% “Yes,” but a key prerequisite hasn’t occurred.
- Traders who understand the prerequisite may sell “Yes”
- Price can remain elevated until enough informed size arrives
Actionable Takeaways
- ✅ Separate “outcome likelihood” from “contract resolution likelihood”
- ✅ Check liquidity and who is likely participating
- ✅ Identify the exact info that would force repricing
- ✅ Prefer markets with clear, objective settlement rules
