Fair Value & Edge

“Which side wins?” and “which side is cheap?” are different questions. Fair value converts a belief into a monetary value; edge compares that value with what you must actually pay.

Formulas #

For a YES share paying 1 on YES and 0 on NO,

$$fair\ value=q, \qquad edge=q-p.$$

$q$ is your estimated YES probability and $p$ is the executable YES purchase price. Before costs, edge equals EV per share.

More likely but overpriced #

At $q=0.65$, YES is more likely. At $p=0.70$, however,

$$edge=0.65-0.70=-0.05.$$

The side can be directionally correct and financially overpriced.

Less likely but attractive #

If YES has $q=0.35$ but trades at $p=0.20$, its edge is +0.15. YES is still less likely to occur, yet the reward for the price can make it attractive.

Life example #

The favorite in a competition may be the best team but a poor wager if everyone is willing to pay too much for it. A weaker team can be a better purchase without becoming the favorite.

Margin of safety #

Trading only when $q-p$ barely exceeds zero assumes $q$ is precise and costs vanish. A safety buffer $m$ requires

$$q-p>costs+m.$$

The buffer is protection against estimation error, not free profit.

Application to no-hedge #

No-hedge tries to buy at a discount to a reference-derived fair value. Because no offsetting trade locks the relationship, the “edge” remains a forecast. Validate complementarity and freshness, subtract real costs, and require an explicit uncertainty buffer.