Mispricings persist due to low liquidity, unclear resolution rules, capital constraints, and lack of arbitrage incentives—especially in niche or long-dated markets.
Detailed Explanation
Unlike large financial markets, prediction markets face:
- Position limits
- Limited participant pools
- Higher relative fees
- Lower professional arbitrage activity
As a result:
- Being “right” is not enough—you must be able to trade enough size
- Rational traders may avoid correcting prices if returns don’t justify effort
Long-dated markets are especially prone to mispricing because:
- Capital is tied up
- Information arrives slowly
- Uncertainty remains unresolved for long periods
Common Scenarios
- Long-horizon political outcomes
- Complex policy implementation
- Niche regional events
- Contracts with ambiguous wording
Exceptions & Edge Cases
- If a catalyst approaches, then mispricing often collapses quickly.
- If professional traders enter, then prices can snap to fair value.
- If settlement rules are clarified, then uncertainty premium disappears.
Practical Examples
- Market prices 70% probability months in advance.
- No new info arrives; price barely moves.
- As deadline nears, price rapidly converges to outcome.
Actionable Takeaways
- ✅ Be patient with long-horizon trades
- ✅ Understand why mispricing exists
- ✅ Monitor catalysts that could unlock repricing
- ✅ Avoid overconfidence in early prices
