How Prediction Market Prices Map to Probabilities
Binary contract prices translate directly into implied probabilities. Here's how to read them — and where the simple translation breaks down.
Every binary prediction contract pays $1 if the event happens and $0 if it doesn't. If the market is pricing the contract at $0.62, traders collectively believe the event has roughly a 62% chance of happening. This direct mapping — price equals probability — is what makes prediction markets so legible.
The basic math
Expected value = (probability of yes) × $1 + (probability of no) × $0. If the market price equals expected value, the price IS the probability. A risk-neutral trader who thinks the true probability is 70% will buy any contract priced below $0.70.
Where the translation gets noisy
Fees, spread, and time value all push price away from the true probability. On Kalshi, a fee on profits means a fair price is slightly above the true probability for yes-buyers. On Polymarket, a wide bid/ask spread on illiquid markets means there's no single "price" to read.
Long-dated markets also discount for opportunity cost — capital tied up for a year should earn a return, so contracts on far-future events trade below their true probability by roughly the risk-free rate.
Reading aggregated odds
When media outlets cite "a 62% chance according to Polymarket," they're reading the midpoint of the bid/ask. That's a fine first approximation, but the spread tells you how confident the market is in its own number. A market quoting 60/64 is far less certain than one quoting 61.8/62.2.