Expected Value of an Event Contract
Definition
The expected value (EV) of an event contract is the average profit per contract a trader would expect if the same trade were repeated many times at their own probability estimate. For a yes contract paying $1, EV equals the estimated probability times $1, minus the price paid and the fee per contract. A positive EV requires the trader's probability to exceed the price plus costs.
Why it matters
EV is the honest test of whether a trade makes sense, and it is unforgiving: a few cents of spread and fee wipe out a modest edge, and an overconfident estimate produces a positive EV that does not exist. Investors should calculate EV at the executable price after fees and be skeptical of their own edge.
Common misconceptions
- •Positive EV does not mean a likely profit on any single trade.
- •EV calculated at the midpoint ignores the spread actually paid.
- •The market price is not a neutral input; using it as your probability yields a loss equal to costs.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Worked example (Kalshi standard schedule)
Ask 62 cents; buy 100 yes; fee $1.65; outlay $63.65.
Belief 70%: EV = 0.70 x $100 - $63.65 = +$6.35.
Belief 63%: EV = 0.63 x $100 - $63.65 = -$0.65.
Belief 62% (the market price): EV = -$1.65, the fee.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- How do I calculate the expected value of an event contract?
- EV per contract = (your probability x $1) - price - fee per contract. For 100 yes contracts at 62 cents with a $1.65 Kalshi fee, a trader who believes the event is 70% likely expects $70.00 - $62.00 - $1.65 = $6.35, or about 6.4 cents per contract.
- What if my estimate is only slightly above the price?
- Fees can turn it negative. At a 63% belief, the same trade has an expected value of $63.00 - $63.65 = -$0.65.
- Whose probability goes into the formula?
- The trader's own estimate. The market price is the crowd's estimate; using it as the probability gives an EV of minus the fee. A trade has positive EV only if the trader has a reason to believe the market is wrong by more than the costs.