Implied Probability
Implied probability is the probability that traders infer from the market price of an outcome contract. In simple prediction markets where a winning share settles at $1, a share trading around $0.65 is often interpreted as approximately a 65% market-implied chance of the outcome occurring.
✦ Key Insight
Implied probability transforms prediction-market prices into an intuitive format. Instead of saying: “YES costs $0.32,” a reader can interpret the market as assigning roughly a 32% probability to the event. However, this is a market estimate, not an objective scientific probability.
✕ Common Misconceptions
Treating 80% as certainty
Ignoring market liquidity
Assuming probability equals poll results
Ignoring spread
Assuming all participants have equal information
Reading very small markets as highly reliable forecasts
Detailed Explanation
How It Works
In a simplified $1-settlement market:
Implied probability ≈ contract price ÷ $1
A YES share priced at:
$0.20 suggests about 20%
$0.50 suggests about 50%
$0.80 suggests about 80%
Real markets may deviate because of fees, spreads, limited liquidity, trading constraints, risk preferences, or market structure.
Polymarket describes prices as reflecting the market's collective belief about the probability of an event.
FAQs
Does a 70% price mean the event will happen?
No.
Can implied probability change quickly?
Yes, particularly after new information.
Can illiquid markets produce misleading probabilities?
Yes.
In Practice
Dig Deeper
Prediction Market
A prediction market is a market where participants trade contracts whose value depends on the outcome of a future event. The event could involve economics, politics, sports, cryptocurrency, weather, or another measurable outcome. The CFTC describes products traded on prediction markets as frequently being called event contracts.
Event Contract
An event contract is a financial contract whose payout depends on whether a specified event or outcome occurs. Event contracts are commonly associated with prediction markets. The CFTC specifically discusses prediction markets and event contracts within US derivatives regulation.
Settlement
Settlement is the process of finalising a trade or contract and transferring the resulting value to the appropriate participants. In prediction markets, settlement generally occurs after the market's outcome has been resolved.