Study Reveals That 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 drive price movements on platforms like Polymarket, while the majority of users 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 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 generally do not exhibit this level of accuracy, instead providing liquidity and generating volume while collectively losing money to the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, reversing the direction of their trades while keeping all other factors constant. The results showed that among the biggest winners, only 12% consistently outperformed the simulated benchmarks, suggesting that many apparent winners may have simply been lucky. The study also found that when skilled traders account for a larger share of trading activity, market accuracy improves, particularly in the period leading up to the resolution of an event. Furthermore, these traders tend to be the first to react to new information, such as Federal Reserve announcements or corporate earnings reports. However, the same edge that makes skilled traders valuable to price discovery also raises concerns when they may be trading on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited, and the study highlights the risk of insider trading in certain cases. For example, in the days leading up to the US removal of Nicolás Maduro from power in Venezuela, three newly created Polymarket accounts placed large bets on the outcome, collectively making over $630,000 when the event occurred. While there is no evidence of wrongdoing in this specific case, the study notes that insider trades can have a significant impact on prices, albeit rarely. Overall, 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.