I made a Guesstimate model for the expected growth rate of a real-money prediction market bet.
Inputs:
Cost of $1 share (cents)
Annualized holding reward (%)
Win probability (%)
Days to resolution
Outputs:
Annualized expected returns (%)
This lets you compare the expected growth rate of participating in the market with the opportunity cost of locking up that capital through market resolution. Note that you can put in ranges using the syntax "90 to 95" (no = sign), which may be useful in the win probability cell.
For those unfamiliar with prediction market mechanics, here's how a simple "yes/no" market works on Polymarket.
Let's say you are confidently X will happen (i.e. you are confident the market will resolve to "yes").
A share of "yes" costs 90 cents at market.
If you buy that share, then you pay 90 cents now. If the market resolves "yes", you get $1 at that time, making a 10 cent profit. You face an opportunity cost of 90 cents for until the market resolves.
Some markets offer a reward for holding shares, typically at a fraction of the current market value of your end of the share, to compensate for this opportunity cost. For example, you might earn an annualized 4% return on the market cost of a "yes" share for select markets on Polymarket. This pays regardless of whether you win or lose.
As an example, if you assign a 95% probability of "yes," a share of "yes" costs 90 cents, there's 200 days until resolution, and the holding reward is 4% annualized, this implies a 14.6% annualized growth rate. Without a reward, it implies a 10.3% annualized growth rate.
I hope this proves useful for both participants and interpreters of prediction markets.
I made a Guesstimate model for the expected growth rate of a real-money prediction market bet.
Inputs:
Outputs:
This lets you compare the expected growth rate of participating in the market with the opportunity cost of locking up that capital through market resolution. Note that you can put in ranges using the syntax "90 to 95" (no = sign), which may be useful in the win probability cell.
For those unfamiliar with prediction market mechanics, here's how a simple "yes/no" market works on Polymarket.
As an example, if you assign a 95% probability of "yes," a share of "yes" costs 90 cents, there's 200 days until resolution, and the holding reward is 4% annualized, this implies a 14.6% annualized growth rate. Without a reward, it implies a 10.3% annualized growth rate.
I hope this proves useful for both participants and interpreters of prediction markets.