Fair Price
Fair price is an estimate of the contract’s true value (often expressed as a probability) based on your information and model, independent of microstructure noise.
Definition
Fair price is your best estimate of what a contract should be worth, based on your information, assumptions, and model. In prediction markets it is often expressed as a probability.
Fair price vs market price
The contract price is what the market currently trades at. The fair price is what you think it should trade at. The difference between the two is your perceived edge, before costs.
Why trading costs matter
Even if you identify a difference between fair price and market price, you still must overcome spread, slippage, and fees. This is why measuring effective spread is useful.
Common pitfalls
Overconfidence: Treat fair price as an estimate with uncertainty, not a fact.
Ignoring constraints: Liquidity and position limits can prevent trading at your fair price even if you are correct.