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

A recent scandal involving a Green Beret accused of 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 be an extreme example of a small group of informed traders who actually influence prices 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 primarily 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, reversing the direction of the trades. The results showed that among the biggest winners, only 12% consistently outperformed the simulated results, 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 final stages before an event's resolution. Furthermore, these traders are often 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 raises concerns when they may be trading on non-public information. The researchers cite the example of the U.S. removal of Nicolás Maduro from power in Venezuela, where three newly created accounts placed large bets on a contract related to the event, collectively making over $630,000. While there is no evidence of wrongdoing, the incident highlights the potential risks associated with insider trading. The study's findings challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they are driven by a small group of informed traders.