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

A recent scandal involving a Green Beret arrested for wagering on a classified U.S. raid may be more than an isolated incident, as a new study suggests it could represent an extreme example of the small, informed trader group that significantly influences 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 from 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 adjusting prices accordingly. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but tend to be on the losing end of trades against the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, reversing the direction of their trades. The results showed that among the top winners by profit, only 12% outperformed the simulated benchmark, and approximately 60% of apparent winners became losers when their performance was evaluated against a separate set of events. The study reveals that the activity of skilled traders enhances market accuracy, particularly in the final stages before an event's resolution. They are also the first to respond to new information, adjusting their positions in reaction to events like Federal Reserve announcements or corporate earnings. However, the same expertise that makes these traders valuable to price discovery raises concerns when they possess non-public information. The researchers cite the example of the U.S. operation to remove Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed unusually large bets on the contract before the event, collectively earning over $630,000. While there is no evidence of wrongdoing, the incident highlights the risk of insider trading. The study's findings challenge the conventional wisdom that prediction markets function due to the collective knowledge of their participants, instead suggesting that they are driven by the actions of a small, informed group of traders.