super interesting, re: spending money to move the line is just another form of non-profit-seeking "consumption."
i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.
> but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap)
I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket.
But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of bets placed?
I think an additional table/graph of how large-bet performance vs small-bet performance would be interesting in general, as well as broken out by market type.
It kinda answers of the question: Are large bets equal to smart money? or are they equal in "smartness" to small bets?
i understand how probability works. the "93 cents" vs "43 cents" comparison is looking at realized historical data, not theoretical odds. if the markets were efficiently priced, you would get 100% back. the entire point of the paper is showing that, historically, they aren't efficiently priced (longshots return ~43%), and explaining who captures that inefficiency.
dataset: 72.1m trades and $18.26b volume on kalshi (2021-2025)
core findings:
longshot bias: well documented longshot bias is present on kalshi. low probability contracts are systematically overpriced. contracts trading at 5 cents only win 4.18% of the time.
wealth transfer: liquidity takers lose money (-1.12% excess return) while liquidity makers earn it (+1.12%).
optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value.
category variation: finance markets are efficient (0.17% maker-taker gap) while high-engagement categories like media and world events are inefficient (>7% gap).
mechanism: makers do not win by out-forecasting takers. they win by passively selling "yes" contracts to optimistic bettors
This reminds me of the old scheme where if you just bet against ND football you'd make money because ND fans were so rabid that the "ND is good" positions became overpriced.
Yes, in the study they pinpointed this beautifully:
“A fan betting on their team to win the championship is not calculating expected value; they are purchasing hope.”
> Optimism tax: the losses are driven by a preference for "yes" outcomes. buying "yes" at 1 cent has a -41% expected value. buying "no" at 1 cent has a +23% expected value.
This is interesting and makes a statement about positive or negative orientation in human psychology. Also, couldn’t the bets just be worded in the double negative instead of the affirmative to influence the optimism bet?
i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.