Why do prediction market probabilities change so quickly after news events?

Prediction markets react quickly because they reprice probabilities, not narratives. A single credible data point can materially shift expected outcomes, causing sharp price moves even when headlines seem incremental.

Detailed Explanation

1. Probability, not sentiment: Markets price expected outcomes, not how important a story "feels." A minor headline can have major probability impact if it changes the expected path.
2. Threshold effects: Many outcomes are binary or have discrete triggers. Crossing a threshold (e.g., an endorsement, a vote count, a data release) can flip the probability quickly.
3. Real-time aggregation: Traders incorporate new information immediately. Unlike polls or forecasts with delays, markets update in seconds.
4. Leveraged positions: Some traders hold concentrated positions, so even small news can trigger aggressive repositioning.

Common Scenarios

• A jobs report comes in slightly above expectations, and rate-cut probabilities drop 15 points in minutes
• A candidate drops out of a race, and remaining candidates reprice instantly
• A court ruling removes uncertainty, causing markets to jump toward 90%+ or 10%-
• A "nothing burger" headline moves markets because it eliminates a tail risk

Exceptions & Edge Cases

• If the market is illiquid, then a single large order can move prices without new information.
• If the news is ambiguous, then you may see a spike followed by reversal as traders digest context.
• If the market has already priced in the news, then the headline may cause no move at all.

Practical Examples

A Fed meeting concludes with no rate change (as expected), but the statement drops a key phrase about "further tightening."

• Headline: "Fed holds rates steady" → sounds boring
• Market impact: Rate-cut probabilities for the next meeting jump from 20% to 45% in minutes
• Lesson: The probability impact was in the language, not the decision

Actionable Takeaways

• ✅ Focus on probability impact, not headline tone
• ✅ Identify which inputs actually drive the final outcome
• ✅ Expect sharp moves when thresholds are crossed
• ✅ Be cautious chasing moves in thin markets