One of the biggest lessons I’ve learned over more than four decades in the markets is that folks aren’t always rational when it comes to probabilities. Often, people let their imagination override the math.
For example, a lottery ticket can win. And in the markets, a stock can quickly double or triple.
But that doesn’t mean it’s likely to happen.
All the same, people imagine the big payoff, with the joy of being right when everyone else was wrong. And they throw their money down, eagerly anticipating their odds-breaking victory.
That creates opportunities for savvy traders…
Market veterans refer to this phenomenon as the “long-shot bias.” At its core, the long-shot bias occurs because folks tend to confuse what is possible with what is probable. Crowds become so focused on the potential reward that they stop paying attention to the odds.
And when enough people pile into a long shot, it can distort the market. Some of the best opportunities I’ve found during my career come from taking the other side of the trade when the crowd becomes too convinced of a rare outcome.
What results is the long shot gets more expensive… and the smaller trade – with a much more likely outcome – becomes too cheap.
And when that happens, it means you can position yourself for the likelier result for a very reasonable price.
Once you understand how it works, you’ll start seeing it everywhere – including the growing world of prediction markets…
Unlike traditional stocks, where dozens of factors can influence price movements, prediction markets are often built around a single event or outcome. Participants are effectively assigning probabilities to what they think will happen next for a range of scenarios, such as:
This makes market psychology much easier to gauge. You can see where the crowd is too optimistic or fearful.
That’s why I’ve been studying prediction markets so closely – and it’s why I want to help more people profit from this fast-growing space.
In many ways, prediction markets remind me of the options market when I first started trading. Back then, some of the biggest opportunities came from recognizing when the crowd had misjudged the odds.
That’s why I’ve become so excited about prediction markets. I went live on Wednesday night to break down exactly how they work — and how to profit from them.
I hope you had the chance to tune in. But if you missed my “Last Unrigged Market in America” event, the replay is available for a limited time — watch it here.
And stay tuned to hear more about the opportunities in this space. Trades are setting up now…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
