Risk, Position Management and Market Behavior
28 words you meet in prediction markets, each one explained plainly.
Asymmetric Payoff
An asymmetric payoff occurs when the potential gain and potential loss on a trade are materially different.
Capital at Risk
Capital at risk is the amount of money exposed to potential loss in a trade or group of trades.
Chasing
Chasing occurs when a trader enters after a substantial price move primarily because they fear missing further movement rather than because the cur...
Concentrated Event Risk
Concentrated event risk occurs when a large portion of a trader's portfolio depends directly or indirectly on the same event, assumption or catalyst.
Conviction
Conviction describes the strength of a trader's belief in their analysis or probability estimate.
Correlated Markets
Correlated markets are prediction markets whose probabilities or outcomes may be influenced by the same underlying events, information or conditions.
Decision Quality
Decision quality describes how sound a trading decision was based on the information, probabilities, price and risks available at the time it was m...
Early Exit
An early exit occurs when a trader closes a prediction market position before final resolution.
Edge Decay
Edge decay describes the reduction or disappearance of a trading advantage as market prices change or new information becomes incorporated.
Estimation Error
Estimation error is the difference between a probability estimate and the underlying probability it is attempting to represent. Because the true pr...
Event Exposure
Event exposure is the amount of portfolio risk ultimately dependent on a particular real world event or outcome.
FOMO
FOMO, or fear of missing out, is the urge to enter a trade because the price is moving quickly or other traders appear to be profiting.
Hold to Resolution Risk
Hold to resolution risk is the additional uncertainty a trader accepts by keeping a prediction market position open until the market reaches its fi...
Longshot Bias
Longshot bias describes a tendency for market participants in some forecasting or wagering environments to overvalue low probability outcomes relat...
Loss Aversion
Loss aversion describes the tendency for losses to feel disproportionately painful relative to equivalent gains.
Maximum Loss
Maximum loss is the greatest amount a trader could lose on a position under the applicable contract structure, excluding circumstances outside the...
Maximum Payout
Maximum payout is the highest settlement value a contract can produce under its stated terms.
Outcome Bias
Outcome bias is the tendency to judge the quality of a decision mainly by what happened afterward rather than by the information and reasoning avai...
Prediction Market Risk
Prediction market risk is the possibility of losing money or experiencing an unexpected outcome when trading contracts linked to future events. Ris...
Probability Compression
Probability compression describes a situation where the gap between a trader's fair probability estimate and the market's implied probability narro...
Probability Invalidation
Probability invalidation occurs when new information materially undermines the assumptions supporting a trader's previous probability estimate.
Probability Risk
Probability risk is the risk that your estimate of an event's likelihood is inaccurate.
Related Markets
Related markets are prediction contracts whose questions, probabilities or outcomes have a meaningful relationship with one another.
Resulting
Resulting is the habit of judging whether a decision was good or bad primarily from its eventual outcome.
Sunk Cost Bias
Sunk cost bias is the tendency to continue with a position because money, time or effort has already been committed, even when the current evidence...
Taking Profit Before Resolution
Taking profit before resolution means reducing or closing a profitable prediction market position before the event's final outcome is determined.
Thesis
A trading thesis is the reasoning behind a position, including why a trader believes the market probability differs from fair probability.
Thesis Drift
Thesis drift occurs when a trader gradually changes the reasoning for holding a position after the original reason for entering has weakened or dis...