Why do some prediction markets stay mispriced for long periods?

Mispricings persist due to low liquidity, unclear resolution rules, capital constraints, and lack of arbitrage incentives—especially in niche or long-dated markets.

Detailed Explanation

Low liquidity:

• Thin markets mean few participants actively correcting prices
• Large orders move prices significantly, discouraging correction

Capital constraints:

• Informed traders may not have sufficient capital to fully correct mispricings
• Opportunity cost of locking capital in long-dated positions

Resolution uncertainty:

• Ambiguous rules create risk that the "correct" side won't pay off as expected
• Smart traders avoid markets where resolution is unpredictable

Lack of arbitrage incentive:

• Unlike securities, prediction market positions are hard to hedge
• Cross-platform arbitrage limited by fees, delays, and withdrawal restrictions

Attention and discovery:

• Niche markets may simply lack informed participants
• No dedicated research coverage or analyst attention

Common Scenarios

• Long-dated election markets trading at stale prices for months
• Obscure event markets with clear mispricings but no liquidity to exploit
• Markets where resolution rules have been disputed in the past
• Multi-year contracts where time value of money makes edge unattractive

Exceptions & Edge Cases

• If a catalyst event approaches (debate, earnings, deadline), then attention and liquidity often spike, correcting prices.
• If a prominent analyst or influencer highlights a mispricing, then rapid correction can occur.
• If the mispricing is small relative to fees and spread, then it may persist indefinitely as it's not profitable to correct.

Practical Examples

Market: "Will Country X default on sovereign debt by 2028?"

• Trading at 15¢ despite analyst consensus suggesting 25% probability
• Low liquidity, 3-year lockup, unclear resolution criteria on "default" definition
• Informed traders avoid due to capital opportunity cost

Market: "Will Startup Y IPO by end of next year?"

• Price stuck at 40¢ for 6 months despite news suggesting delay
• Only 5 trades in past month; nobody is paying attention

Actionable Takeaways

• ✅ Be patient with long-horizon trades
• ✅ Understand why mispricing exists
• ✅ Monitor catalysts that could unlock repricing
• ✅ Avoid overconfidence in early prices