POSITION SIZING BY CONFIDENCE LEVEL
Overview
A systematic framework for sizing prediction market positions based on the strength of your edge, not the attractiveness of the payout. Uses a modified Kelly Criterion to allocate capital proportionally to the true size of your informational advantage.
Setup
- 1.Estimate your true probability (p) for the event — be honest about your uncertainty.
- 2.Calculate your edge: edge = p − contract price (for Yes). If edge < 5%, skip the trade.
- 3.Calculate Kelly fraction: K = (p × b − (1−p)) / b, where b = (1 − price) / price.
- 4.Use half-Kelly (K/2) for practical position sizing to account for estimation error.
- 5.Set a maximum position limit: never allocate more than 10% of PM capital to any single contract.
- 6.Size up on high-conviction, liquid contracts; size down on less-certain, illiquid ones.
Max profit
Limited to ($1.00 − entry price) × contracts. The Kelly Criterion optimizes long-run growth rate by sizing appropriately.
Max loss
Entry price × contracts. Half-Kelly ensures no single bet is large enough to be catastrophic.
Breakeven
Entry price per contract. Consistent positive expected value over many trades is what matters.
When to use
For every prediction market position. Position sizing discipline separates professional PM traders from gamblers. Even a very high-confidence trade should not be sized at >10% of total PM capital.
When to avoid
Don't skip the sizing calculation when you 'feel really good' about a trade — that's exactly when overconfidence is most dangerous.