Study Reveals Only a Small Percentage of Informed Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret arrested for betting on a classified US raid may be more than an isolated incident, as a new study indicates that a small group of informed traders, like the accused soldier, significantly influence prices on platforms such as Polymarket. The study, conducted by researchers from the London Business School and Yale, analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket between 2023 and 2025. The findings show that just 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders generally lose money, providing liquidity and generating volume, but ultimately being on the wrong side of trades against the informed minority. The researchers used a novel approach to distinguish between skill and luck, rerunning each trader's bets 10,000 times with the direction of the bet reversed. This allowed them to filter out chance and identify traders with a genuine edge. The results indicate that among the biggest winners, only 12% outperformed the benchmark, and many apparent winners were actually just lucky. The activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome when they account for a larger share of trading. They are also the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they trade on non-public information. Both Polymarket and Kalshi have strict rules against trading on non-public information, but the study highlights the risk of insider trades, which can move prices aggressively. While insider trades are rare, they can have a significant impact, and the study suggests that they are often concentrated in a handful of events. The findings challenge the conventional wisdom that prediction markets work due to the collective knowledge of the crowd, instead suggesting that they are driven by the actions of a small group of informed traders.