A recent scandal involving a Green Beret arrested for betting on a classified U.S. raid has highlighted a more significant issue in prediction markets. According to a new study, this incident may be an extreme example of the small group of informed traders who drive price movements on platforms like 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 on Polymarket from 2023 to 2025. The findings suggest that just 3% of traders are responsible 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, using a coin flip to determine the direction of the trade.
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 study's findings have significant implications for the functioning of prediction markets, suggesting that the accuracy of these markets depends on the participation of skilled traders who consistently outperform the crowd. The researchers also noted that insider trades, while rare, can have a significant impact on price movements, but are not the primary driver of price discovery. Overall, the study challenges the notion that prediction markets work due to the collective knowledge of their participants, instead highlighting the importance of informed traders in driving market accuracy.