Prediction markets are monetary platforms the place contributors commerce contracts linked to future occasions, with costs reflecting collective chances. Whereas these markets effectively combination data, systematic inefficiencies create buying and selling alternatives. Notable methods embrace inter- and intra-market arbitrage, exploiting worth variations throughout platforms or mispricing inside a single market. Behavioral biases, such because the longshot bias, lead merchants to overvalue underdogs and undervalue favorites, whereas bookmakers could manipulate odds to mislead naive contributors. Skilled merchants can exploit these patterns to safe earnings. This text opinions widespread systematic edges in prediction markets, illustrates their sensible utility, and highlights the potential for worthwhile buying and selling.
Introduction
Prediction markets are monetary platforms the place contributors commerce contracts tied to future occasions. For instance, “Will the Democrats maintain the Senate after the 2026 midterms?” Every contract sometimes has two sides, Sure and No, and pays out 1 USD if the occasion happens or nothing if it doesn’t. The market worth of the “Sure” contract, say, 0.63 USD, may be interpreted because the collective chance (63%) assigned by merchants to that final result.
These markets operate very similar to binary choices, however as a substitute of being pushed by firm earnings or macroeconomic information, they replicate public expectations and personal details about political, social, and even cultural occasions. As a result of each dealer has an incentive to be proper, prediction markets are inclined to combination data effectively, typically outperforming polls or knowledgeable forecasts.
Curiosity in prediction markets has been steadily rising, particularly round election cycles. After the latest U.S. presidential race, platforms equivalent to Polymarket, Kalshi or earlier tasks equivalent to PredictIt noticed file participation and liquidity. With the 2026 U.S. Senate elections approaching, exercise is anticipated to extend once more, as political analysts, journalists, and even extraordinary buyers flip to those markets to gauge the real-time odds of partisan management.
The underlying mechanism is straightforward. Markets remodel collective beliefs into costs. A tighter unfold signifies increased confidence, whereas wider spreads sign uncertainty or restricted liquidity. Although transaction prices and regulation nonetheless restrict retail participation, the rising visibility of those platforms suggests they’re changing into a official various supply of probabilistic perception.
Let’s illustrate the principle precept with a easy instance. Take into account the New York Metropolis mayoral election and the profitable chances of 4 candidates – Zohran Mamdani, Eric Adams, Andrew Cuomo, and Curtis Sliwa, between Could and November 2025. Every candidate had their very own token or contract, for instance: “Zohran Mamdani wins the NYC Mayoral Election 2025.” The evolution of those chances on Polymarket is proven under.
As we are able to observe, Mamdani’s possibilities had been initially under 5%, then started rising sharply in June and stabilized above 80% from July onward. By late October, his chance of profitable was practically 100%, indicating that the market in the end priced him because the overwhelming favourite. Andrew Cuomo skilled a very completely different trajectory. At first of the noticed interval, he was the main candidate till June, when his possibilities dropped considerably and haven’t exceeded 20% since.
This case has the next implications for merchants. As talked about earlier, the value of every contract ranges from 0 to 1 USD, which is interpreted as a chance (0% to 100%). In the course of the market’s lifetime, merchants purchase and promote these contracts primarily based on new data, inflicting costs to alter in actual time, as proven in Determine 1.
Now that the official election outcomes are identified, the market has settled. Since Zohran Mamdani received, his contract paid out 1 USD. For instance, if you happen to had invested in his profitable token 10 occasions when his possibilities had been 30%, paying 10 × 0.30 USD = 3 USD, you’ll obtain 10 × 1 USD = 10 USD, incomes a revenue of seven USD. If he had misplaced, the contract would have paid out 0 USD, and you’ll have misplaced your 3 USD funding.
Just like different funding instruments, buying and selling on prediction markets may also be analyzed and strategized to realize increased earnings. On this article, we are going to current the commonest systematic edges in prediction markets, clarify their underlying rules, and present particular functions of those approaches.
Systematic edges
The intention of this paper is to current a number of buying and selling approaches utilized in predictive markets so as to develop the simplest and worthwhile funding technique. To attain this, we have now reviewed a number of research specializing in this subject and summarized them in a single work to make the subject extra accessible to merchants. Within the following sections, we are going to steadily introduce probably the most well-known patterns.
Arbitrage
On the lookout for an arbitrage alternative is a longstanding method not solely in predictive markets, but additionally in equities, futures or different developed market. Nonetheless, in talked about areas will not be that straightforward to use arbitrage because the markets are already well-developed and established, whereas predictive markets have existed for a comparatively quick time and their inefficiencies, which generally create arbitrage alternatives, will not be but effectively captured. This class contains each inter-exchange and intra-exchange markets.
Inter-exchange arbitrage
Inter-exchange arbitrage alternatives come up when the identical occasion is priced in a different way throughout a number of platforms. The primary thought is to seize the best second by shopping for a contract on the platform the place its worth (implied chance) is decrease and promoting it the place the value is increased. The distinction between these costs is known as the inter-exchange unfold and sometimes exists just for a brief interval as a result of speedy reactions of market contributors.
One of many latest research analyzing inter-exchange arbitrage is Worth Discovery and Buying and selling in Prediction Markets. This paper primarily focuses on political occasions and compares contract costs throughout a number of platforms, particularly Polymarket, Kalshi, and PredictIt. The methodology is easy. The costs of the identical contracts on completely different markets are transformed into chances. When the sum of the possibilities of opposing positions on completely different markets is lower than 1 minus the transaction prices, it signifies an arbitrage alternative.
Determine 2 exhibits the discrepancy between Kalshi and Polymarket, when it comes to each absolute worth unfold and potential arbitrage revenue. The unique determine is Determine 6 within the research.
The research additionally finds that Polymarket typically leads Kalshi resulting from its increased liquidity, making it significantly informative within the final hours earlier than market closing. Nonetheless, these arbitrage alternatives sometimes exist just for a number of seconds, at finest a couple of minutes, and transaction prices considerably scale back the potential earnings.
Into this class, we are able to additionally embrace the research Unravelling the Probabilistic Forest: Arbitrage in Prediction Markets, revealed in 2025, though it doesn’t signify a typical inter‑trade instance. This paper examines when arbitrage arises and whether or not it’s current on Polymarket throughout a number of dependent markets. Due to this fact, it’s not a normal inter‑trade arbitrage case, because it focuses on a single platform, however considers completely different dependent markets inside it. The primary drawback of this method is that it’s not sustainable as a result of unpredictable prevalence of arbitrage alternatives, which normally exist solely briefly. Furthermore, the authors be aware that liquidity and earnings are decrease in comparison with typical inter‑trade arbitrage. How this mechanism works can be defined within the following part.
Intra-exchange arbitrage
In distinction to inter-exchange arbitrage, intra-exchange arbitrage focuses on arbitrage alternatives created by mispricing inside a single market. As talked about earlier, the costs of the contracts signify chances, so the sum of all contract costs ought to equal 1 USD (100%).
Nonetheless, generally contracts are incorrectly priced, and the sum of the costs deviates from 1. When the sum of all contract costs is lower than 1, a buy-all arbitrage alternative arises. A dealer should buy all contracts for lower than 1 USD, say 0.95 USD. Regardless of which contract wins, the dealer will obtain 1 USD, for the reason that profitable contract is included. Due to this fact, by paying 0.95 USD and receiving 1 USD, the dealer secures a risk-free revenue of 0.05 USD.
Conversely, when the sum of all contract costs is bigger than 1, a sell-all arbitrage alternative happens. On this case, the dealer can promote one unit of every contract for, say, 1.05 USD in complete. Ultimately, they might want to pay out 1 USD to the holder of the profitable contract, leading to a risk-free revenue of 0.05 USD.
In each conditions, the arbitrage stems from the truth that contract costs don’t completely align with the payout construction, permitting merchants to take advantage of short-term inefficiencies out there.
The kind of sell-all arbitrage is current in politics ass effectively. Examine Arbitrage in Political Prediction Markets, revealed in 2020, presents mispricing in PredictIt and IEM throughout 2016 U.S. election, specializing in Democratic nomination, Republican nomination and common election. At PredictIt market the sum of all contracts was typically greater than 1 USD principally from 2014 to 2015. Then PredicIt launched linked markets and revenue charges which repeared the fallacious pricing.
Regardless of the 2015 regularization, arbitrage remained sufficiently worthwhile. Market inconsistencies created alternatives of as much as 0.55 USD per contract, representing a 55% revenue. In distinction, the IEM market didn’t exhibit such environment friendly arbitrage alternatives. Equally, throughout the subsequent 2020 election on PredictIt, the revenue from this method was notably decrease than within the earlier election cycle.
The research Unravelling the Probabilistic Forest: Arbitrage in Prediction Markets additionally examines intra-exhange arbitrage opportunuties specializing in Polymarket between 2024 and 2025, protecting not solely political occasions but additionally sports activities occasions. Different notable publications on the subject embrace Election Arbitrage In the course of the 2024 U.S. Presidential Election, which particularly examines arbitrage alternatives within the 2024 U.S. election markets.
Longshot bias
One other systematic edge noticed on prediction markets is longshot bias. This technique falls beneath behavioral results, which means that contract costs are influenced by human elements equivalent to beliefs and decision-making. Longshot bias is a psychological phenomenon that happens when merchants overpay for underdogs, hoping for a bigger payoff with decrease funding if the unlikely final result happens, though the precise chance is low. On prediction markets, the place costs are decided by individuals and their bets on occasions, this typically leads to some contracts being overvalued relative to their true possibilities.
Nonetheless, on this situation, it’s simpler to put money into the true favorites resulting from their increased chance of profitable.
One of many research examing this bias is Biases within the Soccer Betting Market revealed in 2017. Authors analysed 12 084 sport matches from February 2017 to Could 2017 and confirmed that common revenue after betting on favorites was -3.64%, whereas common revenue after betting on outsiders was -26.08%.
Not solely different merchants can create bias, but additionally bookmakers themselves. The research The Favourite-Longshot Midas, revealed in 2020, demonstrates how bookmakers intentionally manipulate morning-line odds to mislead naive merchants into believing that underdogs have a better chance of profitable. The primary goal of this technique is to attenuate the sum of money paid out to profitable bettors. Nonetheless, expert merchants are sometimes capable of acknowledge who the true favourite is and who’s merely a “bait” deliberately set by the bookmakers.
One other research specializing in longshot bias is for instance Worth Biases in a Prediction Market: NFL Contracts on Tradesports (2007) geared toward NFL contracts.
An analogous development is noticed not solely in prediction markets but additionally in shares and ETFs, often called the lottery impact. This impact displays that the market is dominated by retail buyers favoring underdogs, whereas there may be inadequate skilled capital investing within the “boring” however worthwhile shares. Consequently, underdogs are usually overpriced and favorites underpriced.
Different
There are, after all, many different profit-boosting approaches in prediction markets that aren’t included within the earlier classes.
For instance, research Predictive Energy of Info Market Costs (2011) presents a easy buying and selling technique primarily based on observing the buying and selling course of within the prediction market.
However, if you wish to place a wager however lack expertise, you may be within the BetAI utility, which is designed to gather and analyze related information that can assist you decide which contender has the best chance of profitable. Extra data may be discovered within the paper BetAI: a Web3-Native Platform for Prediction Markets, AI Brokers, and Actual-World Asset Possession.
Prediction markets will not be as fashionable as different investing fields like shares, subsequently availibity of research and researches will not be splendid and adequate. Nonetheless, our group will do the very best to maintain you up to date on this subject.
Conclusion
Prediction markets supply distinctive alternatives for knowledgeable merchants to take advantage of systematic edges equivalent to inter- and intra-market arbitrage and behavioral biases just like the longshot bias. Whereas these markets effectively combination data, short-term inefficiencies and mispricings create potential for worthwhile buying and selling methods. In comparison with extra established funding fields equivalent to shares or ETFs, prediction markets are nonetheless comparatively area of interest, and the provision of complete research and analysis is proscribed. However, they proceed to offer useful insights into collective expectations about future occasions. Our group will try to maintain you up to date on developments on this space and supply steerage as analysis and market practices evolve.
Creator: Sona Beluska, Junior Quant Analyst, Quantpedia
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