Implied Probability

In a prediction market, the price of a binary contract directly represents the market's consensus probability. A contract trading at $0.65 implies a 65% probability of the event occurring. This is distinct from bookmaker odds, where the house edge (vig) inflates the sum of all outcome probabilities above 100%.

Well-functioning prediction markets with sufficient liquidity tend to price in all publicly available information efficiently — a property sometimes called the "wisdom of crowds." Research has shown that implied probabilities from liquid prediction markets are better calibrated than most expert forecasts over long time horizons, though they can be distorted by thin liquidity, market manipulation, or structural biases.

It's important to note that implied probability is not a guarantee. A market pricing an event at 80% will see that event fail to occur roughly 20% of the time if the market is well-calibrated. Traders who consistently identify mispricings — where the implied probability diverges from their own informed estimate — can generate positive returns over time.