Research Reveals That a Small Group of Informed Traders Drives Prediction Market Accuracy, Not the Masses

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 the small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of traders incur losses around them. The study, which analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025, found that a mere 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 do not exhibit this level of accuracy, instead providing liquidity and generating volume, but ultimately losing money to the informed minority. The researchers used a novel approach to distinguish between skill and luck, rerunning each trader's bets 10,000 times with the direction of the trade randomized. This allowed them to establish a benchmark for what each trader's profits would look like if they had no real edge. The findings show that among the biggest winners, only 12% consistently outperformed this benchmark, while many apparent winners did not sustain their performance over time. The activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome when they account for a larger share of trading. However, the same edge that makes these traders valuable to price discovery raises concerns when they may be acting on non-public information. The study highlights the risk of insider trading, citing the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created accounts placed unusually large bets on the outcome before the event occurred. While insider trades are rare and concentrated in a handful of events, the study's findings challenge the idea that prediction markets work due to the collective knowledge of their participants, instead suggesting that they are driven by the actions of a small group of informed traders.