Study Reveals Only a Tiny Fraction of Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret accused of 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 represent an extreme example of a small group of informed traders who significantly influence prices on platforms like Polymarket, while the majority of participants incur losses. The study, conducted by researchers from the London Business School and Yale, analyzed over 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025. The findings indicate that just 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 tend to lose money in their trades against the informed minority. To distinguish between skilled traders and those who are simply lucky, the researchers simulated each trader's bets 10,000 times, reversing the direction of their trades. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the simulated results, suggesting that many apparent winners may have been fortunate rather than skilled. The study's findings have significant implications for the functioning of prediction markets, highlighting the importance of informed traders in driving market accuracy. When skilled participants account for a larger share of trading, prices tend to move closer to the correct outcome, particularly in the final stages before resolution. Furthermore, these traders are often the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings. However, the study also raises concerns about the potential for insider trading, particularly when skilled traders have access to non-public information. The researchers cite the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed large bets on the event before it occurred, collectively making over $630,000. While there is no evidence of wrongdoing in this case, the incident highlights the risks associated with insider trading in prediction markets. Overall, the study challenges the conventional wisdom that prediction markets work due to the collective knowledge of their participants. Instead, it appears that the accuracy of these markets depends on the presence of a small group of well-informed traders who drive price discovery.