Study Reveals Only a Small Percentage of Traders Contribute to Prediction Market Accuracy

A recent scandal involving a Green Beret who was arrested for betting on a classified US raid may be more than an isolated incident, according to a new study. The research suggests that this individual may be an extreme example of the small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of participants lose money. The study, conducted by researchers from London Business School and Yale, analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025. The results show that just 3% of traders are responsible for most price discovery, meaning they are the ones who drive prices towards the correct outcome. These traders consistently predict outcomes and move prices in the right direction, while the remaining 97% of traders do not. The researchers found that the key to identifying skilled traders is to distinguish between luck and skill. To do this, they simulated each trader's bets 10,000 times, keeping everything the same except the direction of the trade. This allowed them to establish a benchmark for what each trader's profits would look like if they had no real edge. The findings indicate that among the biggest winners, only 12% beat the benchmark, and many apparent winners did not sustain their performance over time. 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. However, the study also raises questions about the risk of insider trading, particularly when information is not publicly available. The researchers highlight a concrete example of this risk, involving the US removal of Nicolás Maduro from power in Venezuela. In the days leading up to the operation, three newly created Polymarket accounts placed unusually large bets on the outcome, making over $630,000 when the raid occurred. While there is no evidence of wrongdoing, the incident underscores the potential for insider trades to influence prices. The study's findings challenge the idea that prediction markets work due to the collective knowledge of their participants. Instead, they suggest that the accuracy of these markets depends on the presence of informed traders who consistently outperform the crowd.