Study Reveals Only a Fraction of Traders Contribute to 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 represent an extreme example of a small group of informed traders who drive price movements on platforms like 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 between 2023 and 2025. The findings indicate that a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and moving prices in the correct direction. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but tend to lose money in their trades against the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, using the same markets, moments, and dollar amounts, but with the direction of the trade determined by a coin flip. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the 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 skilled traders in driving market accuracy. When these traders account for a larger share of trading, prices tend to move closer to the correct outcome, particularly in the final stages before resolution. Furthermore, they are often 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 also raises concerns about the potential for insider trading. The researchers note that both Polymarket and Kalshi have strict rules against trading on non-public information, but the study grounds this risk in a concrete case: 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 yielded over $630,000 in profits. While there is no evidence of wrongdoing on these accounts, 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, they suggest that the accuracy of these markets depends on the presence of informed traders who consistently outperform the majority.