Strategy
Calibration
The property that events forecast at X percent happen about X percent of the time.
A well-calibrated market loses its 80 percent favorites one time in five. That is not a failure; a market whose 80 percent favorites always won would be underpricing them. Calibration is tested across many markets, never one.
Prediction markets have historically been well calibrated in the middle of the range and slightly off at the extremes, where long shots trade a little too high (the favorite-longshot bias) because a few cents of upside attracts buyers.
When reading a single market, remember that a 70 percent price is a claim about frequency, not a prediction that the thing will happen.
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Frequently asked questions
- What does "Calibration" mean?
- The property that events forecast at X percent happen about X percent of the time.
- Why does calibration matter for prediction markets?
- When reading a single market, remember that a 70 percent price is a claim about frequency, not a prediction that the thing will happen.