Study Reveals Only a Small Group of Informed Traders Drive Accuracy in Prediction Markets

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 are actually responsible for driving prices on platforms like Polymarket, while the majority of participants lose money. 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 between 2023 and 2025. The findings indicate that just 3% of traders are accountable for most price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders 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, keeping all parameters constant except the direction of the trade. The results showed that among the biggest winners by raw profit, only 12% outperformed the simulated benchmark, and many apparent winners did not sustain their performance over time. The activity of skilled traders was found to improve market accuracy, with prices moving closer to the correct outcome, especially in the final stages before resolution. They were also the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders showed little consistent reaction. However, the same edge that makes skilled traders valuable to price discovery raises concerns when that information is not public or is not supposed to be. Both Polymarket and Kalshi have stated that trading on non-public information is strictly against their rules. The study cites a concrete example of this risk, involving the US removal of Nicolás Maduro from power in Venezuela in January. In the days and hours leading up to the operation, three newly created Polymarket accounts placed unusually large bets on a contract asking whether Maduro would be removed, with the market pricing the odds at around 10% at the time. The new accounts collectively made over $630,000 when the raid happened, with two of the accounts stopping trading entirely soon after and the third becoming mostly dormant. While there is no evidence of wrongdoing on these accounts, insider trades, when they occur, were found to move prices even more aggressively per dollar, about seven-to-12 times more than typical skilled trades. However, such trades are rare and concentrated in a handful of events, rather than being the primary driver of price discovery. 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 consistently outperform.