What are the most common mistakes people make when using prediction markets?

The most common mistakes are overtrusting prices, ignoring liquidity and rules, and confusing probability with certainty.

Detailed Explanation

Many users treat prediction market prices as definitive forecasts rather than conditional probabilities shaped by structure and incentives. This leads to several systematic errors:

• Overtrusting prices: A 70% probability still means the event doesn't happen 30% of the time. Users often interpret high probabilities as near-certainties.
• Ignoring liquidity: A price in a thin market may not reflect broad consensus—it might just be one trader's position.
• Skipping the rules: Settlement criteria determine what you're actually betting on. Misunderstanding rules leads to unexpected outcomes.
• Anchoring on price: Users often anchor on current price rather than forming independent views first.

Common Scenarios

• Assuming a 90% market means "it's definitely happening"
• Trading based on price movement without checking depth
• Being surprised by settlement when rules weren't read carefully
• Overconcentrating positions based on market conviction

Exceptions & Edge Cases

• If you have superior information, then the market price may genuinely be wrong—but verify your edge.
• If markets are structurally inefficient (low liquidity, restricted access), then prices may deviate from true probability.
• If you're using markets for information rather than trading, then some mistakes matter less but signal interpretation still matters.

Practical Examples

Common mistake patterns:

• User sees 85% probability, sizes large position, loses when 15% outcome occurs—this isn't a market failure, it's probability working as expected
• Trader buys at 60¢ without noticing $50 total depth, moves price 5% with small order
• Analyst cites market price without noting it's from an illiquid market with five traders
• Investor assumes "Fed hike" market covers all rate increases when rules specify 25bp minimum

Actionable Takeaways

• ✅ Read rules before trading
• ✅ Respect liquidity and costs
• ✅ Size positions conservatively
• ✅ Treat probabilities as estimates, not truths