Research Reveals That Only a Small Percentage of Informed Traders Drive the Accuracy of Prediction Markets

A recent scandal involving a Green Beret who was arrested for betting on a classified US raid may be more than just 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 users end up losing money. The study, which analyzed over 1.72 million accounts and $13.76 billion in trading volume on Polymarket, found that just 3% of traders are responsible for most of the price discovery, meaning they are the ones who drive prices towards the correct outcome. These traders consistently make accurate predictions and move prices in the right direction, while the remaining 97% of traders do not. The study's authors used a unique approach to distinguish between skilled traders and those who are simply lucky, by rerunning each trader's bets 10,000 times with the direction of the bet reversed. The results showed that among the biggest winners, only 12% consistently outperformed the benchmark, and many apparent winners did not sustain their performance over time. The research also found that when skilled traders account for a larger share of trading activity, prices tend to move closer to the correct outcome, especially in the final stages before the event is resolved. However, the study also raises questions about the risk of insider trading, particularly when traders have access to non-public information. The authors cite the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created accounts placed large bets on the outcome before the event occurred, and then stopped trading soon after. While the study's findings challenge the idea that prediction markets work because of the collective knowledge of the crowd, they also highlight the importance of informed traders in driving market accuracy.