Outcome Probability

In a prediction market, the price of a contract directly represents the market's consensus estimate of the probability of that outcome occurring. A contract at $0.72 implies a 72% probability.

CLI:sf scan --min-edge 5

Price as Probability

The fundamental insight of prediction markets is that contract prices are probabilities. A "Yes" contract trading at 72 cents means the market collectively estimates a 72% chance that the event will occur.

Why This Works

Imagine a contract is trading at 40 cents but the true probability is 60%. A rational trader would buy at 40 cents, expecting an average return of 60 cents — a 50% expected profit. Buying pressure would push the price up toward 60 cents until the opportunity disappears. This arbitrage mechanism keeps prices close to true probabilities.

Reading Probability from Markets

When you run sf scan and see a Kalshi contract at 0.35, that's the market saying "35% chance." But the market can be wrong — and that's where edge comes from. If your analysis says the true probability is 50%, the market is mispricing the contract by 15 percentage points.

Probability vs. Confidence

Don't confuse market probability with certainty. A contract at 90 cents is not "certain" — it means there's still a 10% chance of failure. Historically, contracts at 90 cents resolve "No" about 10% of the time, which is exactly what the price predicts.

Calibration

A well-functioning prediction market is "calibrated" — contracts that trade at 70 cents should resolve Yes approximately 70% of the time. Both Kalshi and Polymarket have been shown to be well-calibrated across thousands of settled contracts.

Example

Kalshi event: "Will CPI exceed 3.5% in March 2026?"

  Yes price: $0.23 → Market says 23% probability
  No price:  $0.77 → Market says 77% probability
  Sum:       $1.00 (always)

Your analysis:
  You estimate 35% probability based on PPI data and Fed comments.
  Edge = 35% - 23% = +12 percentage points on the Yes side.
  This is a potential buy signal.

Related Terms

Prediction Market

A prediction market is an exchange where participants trade contracts whose payoff depends on the outcome of future events. The price of a contract reflects the crowd's aggregate estimate of the event's probability.

Binary Contract

A binary contract is a financial instrument that pays out a fixed amount (typically $1) if a specified condition is met, and nothing otherwise. Prediction markets are built on binary contracts.

Edge

Edge is the difference between the market price of a prediction market contract and your estimated true probability. Positive edge means you believe the contract is mispriced in your favor.

Calibration

Calibration measures how accurate probability estimates are over time. A well-calibrated forecaster or market has events priced at 70% actually occurring about 70% of the time.

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