www.lesswrong.com/posts/5tYTKX4pNpiG4vzYg/towards-a-scale-free-theory-of-intelli...
1 correction found
Each trader on a prediction market can choose to buy shares in propositions it thinks are overpriced and sell shares in propositions it thinks are underpriced.
This has the trading direction backwards. In prediction markets, traders buy when they think a contract is underpriced relative to the true probability, and sell when they think it is overpriced.
Full reasoning
The sentence reverses the standard prediction-market logic.
For a binary contract, a trader buys when they believe the market price is below the event’s true probability, because the contract is then undervalued. They sell (or buy the opposite side) when they believe the market price is above the true probability, because the contract is then overvalued.
A current explanation from Kalshi states this explicitly: “If an outcome seems more likely than the current price, traders buy; if less likely, they sell.” That is the opposite of the article’s wording, which says traders buy overpriced propositions and sell underpriced ones.
1 source
- How to translate Kalshi market prices into real-world odds and probabilities
Kalshi explains prediction-market pricing this way: "If an outcome seems more likely than the current price, traders buy; if less likely, they sell."