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

A recent scandal involving a Green Beret accused of betting on a classified US raid has shed light on a more significant issue in prediction markets. According to a new study, this incident may be an extreme example of a broader trend, where a small group of informed traders, like the accused soldier, are actually responsible for moving 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 against the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, keeping all parameters constant except the direction of the trade. The results showed that among the biggest winners by raw profit, only 12% consistently outperformed the simulated benchmark, suggesting that many apparent winners may have simply been lucky. The study also found that when skilled traders account for a larger share of trading, prices tend to move closer to the correct outcome, especially in the final stages before resolution. Furthermore, these traders 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 raises concerns when that information is not publicly available or is sensitive. The paper highlights the risk of insider trading, citing 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 insider trades are rare and concentrated in a handful of events, the study's findings challenge the notion that prediction markets work due to the collective knowledge of their participants. Instead, they suggest that the accuracy of these markets relies on the presence of informed traders who consistently outperform the crowd.