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, as a new study indicates that a small group of informed traders, like the accused soldier, significantly influence prices on Polymarket, while the majority of traders incur losses around them. 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 reveal that a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but ultimately end up 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, 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 also found that the activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome when they account for a larger share of trading. Furthermore, these traders are the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders exhibit little consistent reaction. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they possess non-public information. The paper cites the example of the U.S. 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 trades, which can move prices aggressively. The study's findings challenge the notion that prediction markets work due to the collective knowledge of participants, instead suggesting that they work because of the informed traders who drive price discovery.