The Resolution Problem
Prediction markets work beautifully when the outcome is unambiguous. The election was won by Candidate A. The GDP print was 2.7%. The merger closed. But some events are messy. What if a candidate wins but the result is contested? What if an economic report is revised after initial publication? What if the resolution source contradicts another credible source?
Resolution disputes are the operational risk that most prediction market traders underestimate. You might have the right directional bet, but if the contract resolves in a way you did not expect, your correct analysis does not matter.
Platform-Specific Resolution Mechanisms
Different platforms handle resolution differently. Polymarket uses "official info or consensus of credible reporting" as its resolution standard, which introduces subjectivity about what constitutes "credible reporting." Kalshi may only accept confirmation from specific named sources (the White House, the New York Times). These differences mean the same real-world event can technically resolve YES on one platform and NO on another, creating unexpected basis risk for cross-platform arbitrageurs.
Decentralized prediction markets like Augur use token holder voting for resolution, which introduces the possibility of resolution by economic incentive rather than factual accuracy. If a whale holds enough resolution tokens, they could theoretically influence the resolution in their favor.
Protecting Yourself
The most important pre-trade step is reading the resolution criteria carefully. Not skimming. Reading. What specific source determines the outcome? What happens in ambiguous scenarios? Is there an appeal process? What is the timeline for resolution?
For arbitrage across platforms, resolution criteria comparison is critical. Two contracts that appear to ask the same question might have different resolution sources, different definitions of key terms, or different handling of edge cases. These differences are not always obvious from the contract title and require reading the fine print.
Resolution Risk in Position Sizing
Resolution risk should factor into your position sizing. A contract with clear, unambiguous resolution criteria on a reputable platform with a strong track record of fair resolution warrants larger positions. A contract with vague criteria, a novel resolution mechanism, or on a platform with limited history warrants smaller positions, regardless of how attractive the expected value appears.
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