When do prophets profit in prediction markets?

• URL: http://arxiv.org/abs/2607.06166v2
• Date: Sat, 11 Jul 2026 01:51:28 GMT
• Title: When do prophets profit in prediction markets?
• Abstract summary: We show that proper betting is the only strategy that reliably converts accuracy into profit.<n>A month-long live deployment on Kalshi achieves $+80.33%$ return on investment with a Sharpe ratio of $3.35$.
• Score: 26.557660121922808
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: Prediction markets aggregate dispersed beliefs into prices that act as probabilistic forecasts of uncertain events. Classical theory establishes a clean equivalence between forecasting accuracy and trading profit, but only for the specific automated market maker (AMM) design. However, the largest exchanges today are based on central limit order books in which informed forecasters routinely lose money while uninformed strategies can profit on simple heuristics. We resolve this discrepancy by establishing a formal equivalence between predictive accuracy and profitability. For any strictly proper scoring rule $S$, we exhibit a "proper" betting strategy that depends only on the forecaster's prediction $\mathbf{p}$ and the market price $\mathbf{q}$, and earns positive expected profit whenever $\mathbf{p}$ outperforms $\mathbf{q}$ under $S$ and the market has sufficient liquidity. Moreover, this proper betting is essentially the only strategy with such robust profitability guarantee. The proof rests on a decomposition of expected profit that strictly generalizes the classical AMM guarantee and also explains how strategies can profit without an accuracy edge. Empirically, across thousands of forecasts by AI models, proper betting is the only strategy that reliably converts accuracy into profit, and we further identify systematic forecasting personas and show how the optimal proper strategy varies across them. A month-long live deployment on Kalshi achieves $+80.33\%$ return on investment with a Sharpe ratio of $3.35$.

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