Using Predictive Markets to Analyze Ones Edge

"Predictive Markets are becoming highly popular on major trading brokerages with the latest being Robinhood adding to their platform offering."

Using Predictive Markets to Analyze Ones Edge

Theres not much more enticing and exciting than new games, markets, business ideas and opportunities for the investor and edge gambler.  Unexplored and new terrain can offer serious ROI to participants who can figure out +EV strategies quickly. As a market or a game becomes thought about and participated in, it’s only natural it’ll become more efficient and possibly hitting a Nash Equilibrium point overtime. You can battle it out with participants that are sharp and grind small edges OR you can go to a new marketplace that’s still figuring itself out and where the opportunity and edge is at least theoretically more abundant. While loving competition and testing one’s abilities has its place, we’re also looking to make the maximize our earning potential. The person who can figure out +EV strategies quickest before others is in perhaps the highest ROI spot one could be in. 

This brings me to Prediction Markets. While not entirely brand new, it still feels new enough to me. New enough that it looks like it’s bringing in the masses; you need liquidity to make it worth your while. I personally encountered this idea and market nearly 6 years ago via the startup Ballstreet Sports- strictly a sports-based prediction market. We had the CEO on the Confessions of a Market Maker podcast who had a background on Wall Steet. Due to gambling restrictions or regulations, you couldn’t risk USD, so I never dove heavy into it. I did dabble on the app helping to promote and support someone who the Confessions team developed a good relationship with. Around this time is when Polymarket launched its beta version. I’m sure more of you are familiar with Polymarket now as it made a lot of headlines during this previous US election. If you were paying attention to Polymarket, you knew Trump was on his way to victory way before mainstream media did. Even before both Polymarket and Ballstreet sports, Predictit launched in 2014 focusing on political forecasting- shut down in 2023. This brings us to current day where one of the worlds biggest brokers, Robinhood, is offering prediction market futures contract trading to its offerings. This has my attention and in this article I’ll explain why. I think this will not only be a good exercise for myself to articulate how I evaluate if I have an edge- or at least the potential for one- but this will be good for the reader to see how one goes through the deliberate process of analyzing a new endeavor to see if it’s worthwhile. So, you as a reader will be taking a journey with me as I analyze if allocating my time and capital in attempts to exploit Prediction markets is worth my time. 

 Three things came to mind in reasoning the potential for prediction markets on Robinhood specifically to be profitable- though I’ll also be addressing prediction market strategy in general. The validity of these thoughts we’ll remain to been seen; this is why we scrutinize to the best of our abilities.

1. Robinhood’s demographic- millennials and gen z- seems more inclined towards nontraditional and new forms of investing and gambling; crypto and sports betting/ fantasy sports being popular in this demographic. I’m of this demographic. Liquidity and popularity could be there.

   
   

2.  This demographic seems to be aggressive investors and gamblers as a whole- for better or worse. I suppose this is an anecdotal observation on my part, but seems consistent with perception, trends and just the nature of life; younger generations are more spirited and take risk, where people who are established and built throughout their whole life lean conservative. Risk of ruin is more catastrophic for the older gentlemen than it is for the younger, who has theoretically more time ahead of him. So, I note risk tolerance because while I think aggressive approaches are ubiquitously part of every +EV strategy across all domains, it’s easy to get out of hand and tip into recklessness. 

   
   

3. Reason number 3 I think prediction markets could provide edge, and one that I highlighted in the opening paragraph, the potential for the masses to come to this market, as opposed to a lowly traded or niche market that it once was. More guppies swimming in the pond. 

Ok its great that I have my speculations and hunches on why this may be a profitable activity, but this is meaningless. As a scientist would test his theories, so must we. Before we test our hypothesis, we need to gameplan on how best to test our theories. So, in our case what strategies will prove profitable in prediction markets? I think a best practice is to figure out what’s the big and best question. Asking this and answering it helps simplify the process and get your focus lasered in on what truly matters to the strategy. It’s very easy to get overwhelmed with all the numbers and moving pieces in markets. We must find out what’s truly important to our bottom line, everything else is to be ignored.

 The big and most important question in my mind-perhaps the obvious one- is how do we identify mispriced odds? Or rephrased, how do we identify mispriced win probabilities? Perhaps I’m missing something, but for now that seems to be the crux of being profitable here. If we can identify when the market has miscalculated the probabilities, we make a bet. Every time we identify when this is the case, we will be profitable in the long run. So far so good and sounds amazing to my ears, yet this is assuming we have a model or method that is more accurate than the market at predicting outcomes. This is where the difficulty may lie; at least the majority of the work is going to lie. Since prediction markets span genres, Ill do my best below to get into the model and strategy specifics of each genre and how I’m going to think about it. Having a sports gambling and DFS background, that will be my natural inclination to gravitate genre wise, and I would assume that’s where my biggest edge, if any, lay. At any rate, I want to explore the others genres, as often times +EV spots can lie in unexpected places. 

Sports

My first thoughts here are to think pre-game odds on the prediction markets will mirror Vegas lines. I’d like to think perhaps there are enough donkeys on the Robinhood app that in some cases this won’t be, but there are always sharks lurking wherever there is money. Any inefficiency will get capitalized on quickly, especially ones this obvious. If it was the case where you see the opening contract a significant difference- slight enough difference is good enough to bet too- from the Vegas lines, here is an edge. We’ll call this arbitraging between the prediction market and Vegas lines. Vegas books have been in business for a long time and are most definitely sharp on most sports, especially out right winners- team vs. team and for solo sports player vs. player. While there may be some opportunities here, I wouldn’t count on this being a huge money maker. As I’ll outline later, there may be some botting involved to eat up these quick inefficiencies, so you may need to go down that route to compete here- building yourself an executing bot. 

The more interesting opportunity for arbitrage maybe be in game; Vegas live odds vs. what the prediction market live odds are. To go even further, I’m thinking specifically to an in-game event happening, IE a score, turnover, birdie made, that may cause a emotional reaction to market prices. Again, I don’t know if there is an edge here, but I suspect it’s much more likely than finding one pregame. Having a live script running with in game win probabilities that you trust would be huge here, or monitoring live Vegas odds. Ideally, we would hope our or script updates quickly enough to reaction to the changing market odds, or hopefully same for whatever sports book you’re using to look for arbitrage opportunities. Or perhaps maybe a patient approach and seeing if the odds settle at a price that is still exploitable; we’d have to get in the mix and see for ourselves. 

Most sports I probably won’t have much interest in personally. Golf I would for sure be into; the one sport I concentrate most on in betting and DFS. The natural variance in golf makes it tougher to analyze a player’s talent and his recent form and on whole can instill more bias in the bettor.  I’m sure for the assiduous sports bettor and modeler, there are edges to be found in the other sports

*Note on execution bots. Against the Robinhood terms of service, not Polymarket. Very encouraging for our chances on Robinhood, assuming security and bot detection is good. 

Market & Economic Event Predictions

My first thoughts initially here are I don’t have an edge in the slightest. I flat out think others have access to better information than me here- if not inside information. The only possible tool or angle I can use here: using the general public’s overconfidence against them. Be aware of what the crowd already expects. Often, for major economic events, there are existing probabilities in traditional markets (e.g., the CME FedWatch Tool might show an 80% chance of a rate hike based on bond prices). Similarly, analysts might say there’s a 60% chance MegaCorp beats earnings. The prediction market price will reflect this consensus to a large degree. Sometimes your edge will be on the less likely side. Maybe a rate hike is priced at 80% but you think it’s actually only 60% (perhaps you foresee economic risks others ignore). That means the opposite outcome (“No hike”) is underpriced at 20% when it should be 40%. These contrarian edges can be lucrative – being one of the few willing to bet on the underdog outcome can pay off big if you’re right. Just be sure you have solid reasoning; bucking consensus for its own sake is no virtue. Again personally, this may be the genre I skip over, but if I was, I would look for market overconfidence and take the other direction. 

Random & Novelty Event Predictions

Niche markets can be a lot of fun. Not only are the bets random with a hilarity element too some, but for the most part it we’re all flying blind. Because some of these bets are very unconventional, we don’t have a lot of precedent; we don’t have data we could draw from. But precisely because most, if not all participants are flying blind, gets me to suspect there could be an edge here. Perhaps becoming a common theme in edge finding in this article, we’re looking to spot emotional betting or overconfidence betting in the market. Many participants in novelty markets are probably there for fun, not just profit. This can lead to irrational pricing. For instance, people love a good story or a dramatic outcome – betting “Yes, it will snow on Christmas” because it’s romantic, or “Yes, aliens will be discovered” because it’s exciting. Such optimism -or pessimism, depending on the event- can inflate the prices of outcomes beyond their true probability. Being aware of this tendency is gold for an EV-focused trader. Use common sense and logical reasoning. If a market is about a very unusual event, “Will aliens visit Earth this year?”, ground yourself in reality -extremely low probability. The point is to anchor your expectations in reality, which often gives you a clear edge when others are carried away by novelty excitement. 

Determine the Bias: Why might the market be at 30%? Possibly a recent cold spell or just holiday hopefulness has bettors bullish on snow. Maybe a famous farmer’s almanac predicted a Christmas snow and people took it to heart. Identifying the sentimental or rumor-driven bias behind the mispricing reinforces your confidence to take the contrarian position -betting NO on snow, in this case. 

Note that many novelty events are one-time occurrences. Unlike sports or regular economic reports, you may not get multiple similar bets to average out your edge. This makes it crucial to choose only the best opportunities. If you believe you have an edge, great – but if it’s just marginal, the fact that you can’t replay it means the risk of luck looms larger. 

When trading the unexpected, expect people to be…well, irrational- more so than events that markets have experience modeling for. Taking your time and think in depth about these one off, humerous type bets and they may prove to provide some edge. Scour for any information you can find and ask yourself what the market is thinking and pricing in with these odds. 

Conclusion

So, after going through the analysis of predictions markets, do I think there’s a favorable chance to find an edge? I do yes. A big one? Unsure. Like anything else, it’ll take dedication, a strong will and thoughtfulness to succeed. I think a large part of the equation here is how popular this becomes on Robinhood. If we start getting tons of liquidity and betting on these events, it’ll only increase the chance for +EV spots in my mind. When going through the last section on “Random and Novelty events”, I didn’t expect to get that excited but as I went over it with myself. There may be good opportunity here to capitalize on narrative driven and emotional events- something that became of theme in this article. When a lot of these events have been modeled out before, it’s hard to find edges. These novel events haven’t and there could be potential there. 

As always, stay safe and smart out there. Feel free to reach out on X. Use stops though.

-- Ray (AllxDayxRay on X)

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