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

A recent scandal involving a Green Beret arrested for betting on a classified U.S. raid may be more than an isolated incident, as a new study suggests it could be an extreme example of the small group of informed traders who actually influence prices on Polymarket, while the majority of traders incur losses. The study, conducted by researchers from London Business School and Yale, analyzed 1.72 million accounts and $13.76 billion in trading volume from 2023 to 2025, concluding that a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and moving prices in the correct direction. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but ultimately end up on the losing side of trades against the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, using the same markets, moments, and dollar amounts, but with the direction determined by a coin flip. The results showed that among the biggest winners by raw profit, only 12% outperformed the benchmark, and many apparent winners did not sustain their performance. The study found that the activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome, especially in the final stretch before resolution. However, the same edge that makes skilled traders valuable to price discovery raises concerns when the information is not public or is not supposed to be. The researchers cited the example of the U.S. removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed unusually large bets on the contract before the price moved, collectively making over $630,000. While insider trades are rare and concentrated in a handful of events, the study's findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed traders who drive price discovery.