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

A recent scandal involving a Green Beret arrested for 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 part of a small group of informed traders who actually influence prices 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 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 the same markets, moments, and dollar amounts but with the direction determined by a coin flip. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, and many apparent winners did not sustain their performance over time. The study's findings have implications for the functioning of prediction markets, suggesting that their accuracy is driven by the activity of skilled traders rather than the collective knowledge of the crowd. When skilled participants account for a larger share of trading, prices tend to 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 also raises concerns about the potential for insider trading, particularly when information is not publicly available. The researchers highlight a specific case involving the U.S. removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed large bets on the outcome before the event, collectively making over $630,000. While there is no evidence of wrongdoing in this instance, the study's findings challenge the idea that prediction markets work due to the wisdom of the crowd, instead suggesting that they are driven by the actions of a small group of informed traders.