Study Reveals Only a Small Percentage of Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret arrested for betting on a classified U.S. 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 the small group of informed traders who actually influence prices on Polymarket, while the majority of participants 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 indicate that just 3% of traders are responsible for most price discovery, consistently predicting outcomes and driving prices in the right direction. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but tend to be 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 the same markets, moments, and dollar amounts, but with the direction of the trade determined by a coin flip. The results showed that among the biggest winners, only 12% consistently outperformed the benchmark, while many apparent winners did not sustain their performance over time. The study also found that when skilled traders account for a larger share of trading, prices tend to move closer to the correct outcome, particularly in the final stages before resolution. Furthermore, these traders are often the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders exhibit little consistent response. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be acting on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The researchers illustrate this risk using the example of the U.S. removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed unusually large bets on the contract before the event, collectively making over $630,000. While there is no evidence of wrongdoing in this case, the study highlights the potential for insider trades to aggressively move prices, albeit rarely and in concentrated events. Overall, the findings challenge the notion that prediction markets work due to the collective knowledge of participants, instead suggesting that they work because of the informed traders who drive price discovery.