Scalar Market
Definition
A Scalar Market has an outcome that is a value in a range (e.g., unemployment 4–6%). Payouts can be thresholded or linear with the realized value.
Structure
Unlike binary (Yes/No) or categorical (A/B/C) markets, scalar markets trade on numerical outcomes within a specified range:
- Continuous range: e.g., 4.0% to 6.0% unemployment
- Threshold or linear payout: Depends on platform design
- More complex pricing: Requires understanding of distributions
Types of Scalar Markets
Threshold Scalar
Pays based on whether the outcome exceeds a threshold:
Example: "Will unemployment exceed 5.0%?"
- Range: 4.0% - 6.0%
- If outcome ≥ 5.0%: Pays $1.00
- If outcome < 5.0%: Pays $0.00
This is effectively a binary market within a scalar framework.
Linear Scalar
Pays proportionally based on where the outcome falls in the range:
Example: "Unemployment rate in December"
- Range: 4.0% - 6.0%
- If outcome = 4.0%: Pays $0.00
- If outcome = 5.0%: Pays $0.50
- If outcome = 6.0%: Pays $1.00
Payout formula:
Payout = (Actual Value − Min) / (Max − Min)
Example Markets
Economic Indicators
"What will GDP growth be in Q4 2024?"
- Range: -2.0% to +4.0%
- Linear payout
"What will the unemployment rate be in December?"
- Range: 3.5% to 6.5%
- Linear payout
Temperature/Weather
"High temperature in NYC on July 4th?"
- Range: 75°F to 95°F
- Linear payout
Sports
"Total points scored in the Super Bowl?"
- Range: 30 to 70 points
- Linear payout
Trading Strategy
Expected Value Calculation
For linear scalar markets, calculate expected value based on your probability distribution:
EV = ∫ Payout(x) × Probability(x) dx
In practice:
- Estimate the probability distribution of the outcome
- Calculate the expected payout
- Compare to current market price
- Buy if expected payout > price
Hedging
Scalar markets allow fine-tuned hedging:
- Buy contracts at multiple price points
- Create custom payout profiles
- Hedge specific ranges of outcomes
Advantages
- Granular forecasting: Capture full probability distribution
- Better for continuous variables: GDP, temperature, scores
- Hedging flexibility: Trade specific ranges
Challenges
- Complex pricing: Harder to understand fair value
- Lower liquidity: Less popular than binary markets
- Distribution uncertainty: Need to forecast entire distribution
Platform Differences
Different platforms implement scalar markets differently:
- Some use threshold payouts (simplified)
- Some use linear payouts (true scalar)
- Some allow trading on range buckets