Resolution Risk
Definition
Resolution risk is the risk that an event contract settles against a trader who was right about the real-world event, because of the contract's exact wording, its named source, its cutoff time or the way the venue or oracle resolves it. It is separate from the risk of being wrong about the event itself, and it is managed by reading the rules rather than by forecasting better.
Why it matters
Resolution risk is the cost most often ignored by people who trade on news. It cannot be diversified away by being a better forecaster. Investors should treat a market's rules as part of the price: a contract with vague wording or a slow, contestable resolution process deserves a lower price than the headline probability suggests.
Common misconceptions
- •Being right about the event is not the same as winning the contract.
- •Headline coverage is not a settlement source.
- •Resolution risk is highest near cutoffs and in subjective questions.
- •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 (illustrative): headline vs rules
Market: 'Will Company X announce a merger by June 30?' Rules: resolves yes only if Company X issues a press release on its investor relations site by 11:59 p.m. ET on June 30.
June 30, 8 p.m. ET: major outlets report the merger, citing sources; Company X says nothing.
July 1, 7 a.m. ET: Company X issues the press release.
Headline outcome: merger announced. Contract outcome: no. A trader who bought yes after the news reports loses.
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
- Can I predict the real-world event correctly and still lose the contract?
- Yes. If the rules require a specific source, version, time zone or form of words, an outcome that satisfies the headline but not the rules resolves against you. Kalshi warns that 'markets are not re-settled because an event appears to have concluded while trading was still available,' and Polymarket says 'The market title describes the market, but the rules define how it should be resolved.'
- Where does resolution risk come from?
- From five places: wording (what counts), source (who reports it), timing (by when, in which time zone), revisions (which release), and process (who decides and how disputes work). Each has its own page in this library.
- How do I reduce it?
- Read the full rules before trading, prefer markets with objective sources and clear cutoffs, avoid markets that depend on interpretation, and size positions in ambiguous markets as if a share of the payoff were uncertain.