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

A recent scandal involving a Green Beret's alleged 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 part of a small group of informed traders who significantly 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 moving prices in the right direction. In contrast, the remaining 97% of traders largely fail to do so, 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. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the simulated benchmark, suggesting that many apparent winners may have simply been lucky. The study's findings have significant implications for the functioning of prediction markets, highlighting the importance of informed traders in driving market accuracy. When skilled participants account for a larger share of trading, prices tend to move closer to the correct outcome, particularly in the final stages before resolution. However, the same edge that makes skilled traders valuable to price discovery also raises concerns about the potential for insider trading, particularly when information is not publicly available. The researchers cite the example of the US 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 incident highlights the risks associated with insider trading in prediction markets. Ultimately, the study challenges the conventional wisdom 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.