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 a small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of users incur losses. The study, which analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket, found 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, whereas the remaining 97% mostly do not. The researchers used a unique approach to distinguish between skill and luck, rerunning each trader's bets 10,000 times with the same parameters but with the direction of the trade determined by a coin flip. The results showed that among the biggest winners, only 12% beat the benchmark, indicating that many apparent winners were simply lucky. The activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome, especially in the final stages before resolution. However, the same edge that makes skilled traders valuable to price discovery raises concerns when the information they are using is not public or is not supposed to be. The study highlights the risk of insider trading, citing a concrete example where three newly created accounts on Polymarket placed large bets on a contract related to the US removal of Nicolás Maduro from power in Venezuela, collectively making over $630,000. The findings challenge the idea that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the presence of informed traders.