Probability &
Prediction-Market Lab

01 / PRICE LITERACY

The spread costs something.

Imagine entering at the ask and immediately exiting at the bid, with the same unchanged quote. This simplified example assumes full fills; it excludes changing prices, depth and slippage.

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Entry quote cost

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Exit quote proceeds

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Spread difference

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Spread + extra costs

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Try it: narrow the ask to 0.45. What changes? Default worked answer: 20 × (0.60 − 0.40) + 0.75 = $4.75 of fictional friction, not a return forecast.

02 / UNCERTAINTY LITERACY

Score a forecast, not yourself.

For a fictional yes/no event, record a probability before learning its outcome. The binary Brier score is (probability − outcome)²; lower is less error for that observation.

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One binary Brier score

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Try it: change the outcome, keeping probability 0.70. The scores are 0.0900 for yes and 0.4900 for no. One score does not establish calibration, skill or future performance. To explore calibration, compare many dated forecasts in similar probability bands with their observed frequencies.

03 / Rules before headlines

Invented case: “Will the practice library open by day 10?” Define “open”, the dated source and missing-evidence rule before assigning a probability. Real markets resolve by their written rules and sources; disputes or clarifications can delay or affect resolution. A losing position may become worthless.