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

A recent scandal involving a Green Beret arrested for betting on a classified US raid may be more than an isolated incident, according to a new study. The research suggests that the soldier's actions 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 the 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 provide liquidity and generate volume but tend to be on the losing side of trades. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, using a coin flip to determine the direction of the trade. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, while many apparent winners did not sustain their performance over time. The study also found that when skilled traders account for a larger share of trading, prices move closer to the correct outcome, especially in the final stages before resolution. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be acting on non-public information. 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, the incident highlights the risk of insider trading in prediction markets. The study's findings challenge the idea that prediction markets work due to the collective knowledge of their participants, instead suggesting that they rely on the expertise of a small group of informed traders.