Study Reveals Only a Small Group of Informed Traders Drive Prediction Markets' 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, conducted by Roberto Gómez-Cram, Yunhan Guo, Theis Ingerslev Jensen, and Howard Kung of London Business School and Yale, analyzed every Polymarket trade from 2023 to 2025 and found that a mere 3% of traders are responsible for the majority of price discovery, moving prices towards the correct outcome. These informed traders consistently predict outcomes and move prices in the right direction, while the remaining 97% of traders mostly provide liquidity and generate volume, but ultimately end up on the losing side of trades. The study's findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed minority. The researchers used a unique approach to distinguish between skill and luck, rerunning each trader's bets 10,000 times with the same parameters but with the direction of the bet 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 activity of skilled traders was found to improve market accuracy, with prices moving closer to the correct outcome when they accounted for a larger share of trading. However, the study also raises concerns about the potential for insider trading, citing a concrete example of three newly created Polymarket accounts that made unusually large bets on a contract related to the U.S. removal of Nicolás Maduro from power in Venezuela. While there is no evidence of wrongdoing on these accounts, the study's findings highlight the risks associated with trading on non-public information and the need for prediction markets to ensure that their rules are strictly enforced.