Every wager placed on a prediction market boils down to a single calculation: expected value. Master this formula and you'll never place a bet without knowing your odds of success, the frequency you need to be correct, and the threshold probability required to avoid losses.
Basic Return Calculation
When you purchase a YES share at price P:
- Win return: (1 - P) / P × 100% = your percentage gain should YES occur
- Loss: 100% of your initial investment if NO occurs
- Break-even probability: P (the market price itself represents your break-even threshold)
Examples:
- YES at $0.20: win = +400%, break-even = 20%
- YES at $0.50: win = +100%, break-even = 50%
- YES at $0.75: win = +33%, break-even = 75%
- YES at $0.90: win = +11%, break-even = 90%
Expected Value Formula
EV = (Your probability × Win amount) - ((1 - Your probability) × Stake)
Suppose you stake $100 on YES priced at $0.40, and you assess the true probability at 55%:
- Win amount if YES: $150 (you collect $250 total, having risked $100)
- Loss if NO: -$100
- EV = (0.55 × $150) - (0.45 × $100) = $82.50 - $45 = +$37.50 expected value
How to Use This in Practice
- Before committing capital, establish your probability estimate FIRST
- Determine the break-even probability (which equals the market price)
- If your estimate exceeds break-even by more than the spread: compelling opportunity
- If your estimate falls below break-even: examine NO shares as an alternative
- If your estimate aligns with break-even: pass — the edge is insufficient
Position Size Calculator
Using half-Kelly: f = 0.5 × (bp - q) / b
- For a scenario where your p = 0.65, market = 0.40: b = 1.5, q = 0.35
- Full Kelly: (1.5 × 0.65 - 0.35) / 1.5 = 0.42 (42% of bankroll)
- Half Kelly: 21% of bankroll — yet adhere to the 5% per-position maximum
FAQ
- Is there an automated calculator for prediction market trades?
- PolyGram displays projected execution price, quantity of shares, and projected return on the trade screen prior to submission. Independent EV analysis remains useful for evaluating trades beforehand.
- How do spreads affect the return calculation?
- Modify your effective purchase price by incorporating half the spread width. When YES carries a bid of 0.38 and ask of 0.42, your realistic entry point is approximately 0.42 rather than 0.40.