The Favourite-Longshot Bias
Prediction markets are, on the whole, impressively well calibrated through the middle of the probability range. The reliable exception is the tails: contracts priced below roughly 20 to 30 cents tend to be worth less than they cost, and near-certainties tend to be worth slightly more. This is the favourite-longshot bias, one of the oldest and best-documented regularities in betting and event markets alike.
What the bias looks like
Take a large sample of contracts that traded at 10 cents. Calibration would mean about of them resolve Yes. In practice the resolved rate runs persistently below the price, often strikingly so for the cheapest contracts: sub-5-cent claims that win a fraction of a percent of the time. Buyers of longshots are systematically paying above fair value; holders of the matching favourites are being paid slightly less than fair for carrying near-certainty.
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