Do prediction market odds equal probability? Not quite

A US exchange can list a new prediction market by filing a form saying the contract complies with the law, and start trading the next day. No approval required. Summary Prediction market prices are well calibrated overall: studies of thousands of settled markets find outcomes occurring at close to their implied frequencies, with accuracy that beats individual experts and polls. The best-documented distortion is the favorite-longshot bias: cheap contracts win less often than their prices imply and expensive contracts win slightly more, so buyers of long shots earn systematically negative returns. Capital lock-up is the least discussed distortion: a contract paying $1 in six months is worth less than its probability today because the money is committed and earning nothing, which pushes long-dated prices below fair value. Calibration varies by domain and horizon, with political markets showing compression toward 50% at long horizons, attributed to opposing partisan bets cancelling instead of informing. Fees, spreads, and the maker-taker split move realized returns meaningfully on instruments priced in cents, and resolution risk sits underneath everything as the possibility that a corr...