New Study Reveals Only a Small Percentage of Traders Contribute to Prediction Market Accuracy

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 significantly influence prices on platforms like Polymarket, while the majority of users incur losses. The study, conducted by researchers from the London Business School and Yale, analyzed 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 responsible for the majority of price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders tend to lose money, providing liquidity and generating volume, but ultimately being 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 the same except the direction of the trade. This allowed them to establish a benchmark for what each trader's profits would look like without any real edge. The results show that among the biggest winners by raw profit, only 12% outperformed the benchmark, and 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, especially in the final stages before resolution. They are also the first to react to new information, adjusting their positions in response to events like Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they possess non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The study highlights the risk of insider trading, citing the example of the US removal of Nicolás Maduro from power in Venezuela. In the days leading up to the operation, three newly created Polymarket accounts placed unusually large bets on the contract, collectively making over $630,000 when the event occurred. While there is no evidence of wrongdoing on these accounts, the incident underscores the potential for insider trades to aggressively move prices. The findings challenge the notion 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.