Polymarket weather forecasts bias shifts from longshots to favorites over time
Time-Varying Favorite-Longshot Bias in Polymarket Weather Markets
Databases
Summary
Prediction markets where people bet on weather outcomes sometimes misprice probabilities. This study finds that bets on unlikely weather events are priced too high far in advance, but as the weather event gets closer, bets on more likely outcomes become overpriced instead. The biggest bias happens just hours before the event, especially for favorites. Attempts to correct these biases using simple methods weren't clearly effective. The authors use special scoring and tests to analyze these changing biases over time.
What this means in practice
- •For market operators: Improve market design and timing by knowing when favorite and longshot mispricings appear in weather markets.
- •For risk management teams: Adjust risk models to account for large favorite-side pricing errors in weather prediction markets near event time.
Authors
Shouchen Qiu, Huaijun Qiu
Abstract
Prediction-market prices combine traders' judgments about future outcomes, but their errors may be concentrated in particular price ranges and change as settlement approaches. Prior cross-category evidence shows that Polymarket weather markets have larger pricing bias than other major categories, without separating low-price longshots from high-price favorites. This study compares the two ranges at different horizons in daily maximum-temperature markets. Event-level probability scores, cubic B-spline recalibration, and Buy-NO tests are used to examine the form and effect of the bias. Longshot overpricing mainly occurs at distant horizons, whereas favorite overpricing becomes much stronger during the final 1-12 hours and is nearly one order of magnitude larger. Event-level scores improve toward the daily temperature peak, while simple recalibration yields no statistically significant gains. The Buy-NO results in the corresponding time windows also show that the main pricing error is concentrated at the favorite end.