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

A recent scandal involving a Green Beret who was arrested for betting on a classified US raid highlights a more significant issue with prediction markets. According to a new study, this incident may be an extreme example of the 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 the London Business School and Yale, analyzed over 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025. The results show that just 3% of traders are responsible for the majority of price discovery, meaning they are the ones who drive prices towards the correct outcome. These traders consistently demonstrate an ability to predict outcomes and move prices in the right direction, while the remaining 97% of traders generally do not. The challenge lies in distinguishing between skill and luck, as many traders may experience significant winnings by chance alone. To address this, the researchers simulated each trader's bets 10,000 times, using the same markets, moments, and dollar amounts, but with the direction of the bet determined by a coin flip. This provided a benchmark for what each trader's profits would look like without any real edge. The findings indicate that among the biggest winners by raw profit, only 12% beat 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, such as Federal Reserve announcements or corporate earnings, while other traders show little consistent reaction. However, the same edge that makes skilled traders valuable to price discovery raises concerns when that information is not public or is not supposed to be. 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, which ultimately resulted in collective profits of over $630,000. While there is no evidence of wrongdoing, the incident underscores the potential risks associated with insider trading. The findings challenge the idea that prediction markets work due to the collective knowledge of the crowd, instead suggesting that they work because of the informed traders who drive price discovery.