DERIVATIVES ENGINE // PROBABILITY DECOMPOSITION

Market-to-Probability Converter — Fair Odds & Expected Value (EV)

Convert prediction market share prices into implied probabilities, fair decimal/American odds, and expected value (EV) with real-time edge calibration.

Market Benchmark Presets:

CONTRACT PRICING & ESTIMATION

Contract Yes Price (Cents: $0.01 – $0.99) $0.50

$0.01 $0.50 $0.99

Model / Estimated True Probability (%) 55.0%

1% 50% 99%

Target Position Stake ($)

Yes / No Share Allocation 50% / 50%

Yes: $0.50 No: $0.50

IMPLIED PROBABILITY

50.0%

FAIR DECIMAL ODDS

2.00x

MONEYLINE / AMERICAN

+100

EXPECTED VALUE (EV)

+$50.00

THEORETICAL EDGE / ROI

+10.0%

Market Implied vs True Model Gap

+5.0%

Mathematical Odds & Payout Equivalence

Purchased Contracts (Shares): 1,000 contracts

Gross Payout on Win ($1.00/share): $1,000.00 (+$500 profit)

Total Cost on Loss (Risk Amount): -$500.00 (100% loss)

INSIGHT: If your model's true probability exceeds market-implied probability, positive mathematical expectation exists. Always calibrate bet sizing with the Binary Kelly Calculator.

Frequently Answered Questions

How does a prediction market price represent implied probability?

In a binary outcome market where contracts pay $1.00 on resolution and $0.00 on failure, a market price of $0.62 directly represents a 62.0% market-implied consensus probability of occurrence.

How is Expected Value (EV) calculated on binary contracts?

EV = (True Probability * Net Profit on Win) - ((1 - True Probability) * Position Stake). A contract bought at 40¢ with a true 50% probability yields an expected gain of +$0.25 per dollar invested (+25.0% EV ROI).

What is the Favorite-Longshot bias in prediction markets?

Empirical studies show that outcomes priced below 10¢ are consistently overpriced by casual traders seeking high asymmetric returns, creating systematic negative EV for longshot buyers and profitable liquidity provision for market makers.