Normalize Probabilities
Normalize probabilities means adjusting a set of probabilities so they sum to 1, often used for multi-outcome markets or models.
Definition
Normalize probabilities means adjusting a collection of probabilities so the total equals 1. This is common when you have multiple mutually exclusive outcomes and you want the set to form a valid distribution.
Why it matters
In multi-outcome settings, raw model outputs can be inconsistent. Normalization ensures your probabilities behave like probabilities, which is critical for pricing and for scoring methods such as proper scoring rule.
Common pitfalls
Normalizing bad inputs: If base inputs are wrong, normalization only hides the problem.
Mixing overlapping outcomes: Normalization assumes outcomes are mutually exclusive and collectively exhaustive.