Categorical Market
Definition
A Categorical Market has multiple mutually exclusive outcomes (A/B/C…). Outcome prices sum to ~100% as probabilities (or ~$1).
Structure
Unlike binary markets with just Yes/No, categorical markets offer multiple choices:
- Multiple outcomes: 3 or more options
- Mutually exclusive: Only one can happen
- Sum to 100%: All prices add up to approximately $1.00
Examples
Political Elections
"Who will win the 2024 Presidential Election?"
- Candidate A: $0.45 (45%)
- Candidate B: $0.38 (38%)
- Candidate C: $0.12 (12%)
- Other: $0.05 (5%)
- Sum: $1.00 (100%)
Economic Outcomes
"What will the Fed's next rate decision be?"
- Cut 0.25%: $0.15
- Cut 0.50%: $0.05
- No change: $0.60
- Hike 0.25%: $0.18
- Hike 0.50%: $0.02
- Sum: $1.00
Sports
"Which team will win the championship?"
- Team A: $0.35
- Team B: $0.28
- Team C: $0.20
- Team D: $0.12
- Other: $0.05
How to Read Prices
Each price represents that outcome's implied probability:
- Higher price = More likely
- Prices must sum to ~$1.00 (ignoring fees)
Trading Strategy
Finding Value
Look for outcomes where you believe:
Your probability > Market price
Arbitrage Opportunities
If prices sum to more or less than $1.00, arbitrage may be possible by buying/selling multiple outcomes.
Payout Structure
At resolution:
- Winning outcome pays $1.00 per share
- All other outcomes pay $0.00 per share
Example Trade
Market: "Next Fed rate decision?"
Your analysis:
- Cut 0.25%: You think 25%, Market shows $0.15 ✓ Underpriced
- No change: You think 50%, Market shows $0.60 ✗ Overpriced
- Hike 0.25%: You think 25%, Market shows $0.18 ✓ Underpriced
Action: Buy "Cut 0.25%" and "Hike 0.25%" shares
Advantages
- Nuanced forecasting: Capture probability across multiple scenarios
- More information: Shows relative likelihood of each outcome
- Better for complex events: Elections, tournaments, multi-way decisions
Challenges
- Lower liquidity: Volume spread across multiple outcomes
- Complex pricing: Harder to spot value
- Correlation risk: Related outcomes may move together