Implied Probability
Implied probability is the probability suggested by a market price. In many prediction markets priced from 0 to 1 (or 0 to 100 cents), price is often interpreted as probability.
Definition
Implied probability is the probability suggested by a contract price. In many prediction markets that trade from 0 to 1 (or 0 to 100 cents), the price is commonly interpreted as an estimate of the chance that an outcome happens.
How it maps to price
• If price is in 0 to 1, implied probability is approximately the same number (e.g. 0.62 ≈ 62%).
• If price is in cents (0 to 100), implied probability is price divided by 100 (e.g. 62c ≈ 62%).
Why it matters
This mapping is why concepts like mispricing are often discussed in probability terms. It also explains why tight execution costs, like low effective spread, can matter even when price moves are small.
Common pitfalls
Not always a true probability: Price can deviate from probability due to fees, risk premia, liquidity, constraints, or market structure.
Ignoring costs: A small edge in implied probability can be wiped out by spread, slippage, and fees.