Probability, Pricing and Expected Value
24 words you meet in prediction markets, each one explained plainly.
Base Rate
A base rate is the historical or general frequency with which a type of event occurs before considering the specific details of the current case.
Base Rate Neglect
Base rate neglect occurs when someone focuses heavily on the specific details of a situation while giving insufficient weight to how frequently sim...
Bayesian Updating
Bayesian updating is the process of revising an existing probability estimate as new evidence becomes available. In formal statistics it can be exp...
Calibration
Calibration measures whether probability forecasts correspond reasonably well with how often those outcomes actually occur over many forecasts.
Conditional Probability
Conditional probability is the probability of one event occurring given that another event has occurred or condition is known.
Confidence Range
A confidence range is a practical range of probabilities a forecaster considers plausible for an outcome rather than pretending one precise estimat...
Edge
An edge is an advantage that gives a trader reason to believe a market is priced differently from its true probability or expected value.
Expected Value
Expected value, often abbreviated EV, estimates the average value of a decision if the same type of situation could be repeated many times under th...
Fair Probability
Fair probability is the probability a trader believes most accurately reflects the likelihood of an outcome after considering the available evidence.
Margin of Safety
In prediction market trading, a margin of safety is the buffer a trader requires between the market price and their estimated fair value before con...
Minimum Edge
Minimum edge is the smallest difference between a trader's estimated fair probability and the market price that the trader requires before consider...
Mispricing
Mispricing occurs when a prediction contract's market price differs meaningfully from what a trader believes is its fair value.
Negative Expected Value (−EV)
Negative expected value describes a decision whose probability weighted expected return is lower than its cost under the assumptions being used. It...
Overconfidence
Overconfidence occurs when a trader has greater confidence in their judgement or probability estimate than the available evidence justifies.
Positive Expected Value (+EV)
Positive expected value describes a decision whose probability weighted expected return is greater than its cost under the assumptions being used....
Posterior Probability
Posterior probability is the revised probability assigned to an outcome after new evidence has been incorporated into the previous estimate.
Prior Probability
Prior probability is the probability assigned to an outcome before incorporating a new piece of information or evidence.
Probability
Probability measures how likely an outcome is considered to be, usually expressed between 0% and 100%. A probability of 0% represents an outcome co...
Probability Edge
Probability edge is the difference between a trader's estimated probability and the probability implied by the market. For example: Market: 55% Tra...
Probability Estimate
A probability estimate is your assessment of how likely an outcome is to occur based on the information, evidence and reasoning available to you.
Probability Update
A probability update is a change to an existing probability estimate after receiving new information.
Reference Class
A reference class is a group of comparable historical situations used to help estimate the probability of a current event.
Subjective Probability
Subjective probability is a probability assigned to an outcome based on an individual's assessment of the available evidence rather than solely on...
Uncertainty
Uncertainty describes the fact that the future outcome is not known and that probability estimates themselves may also be imperfect.