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 the soldier's actions may be an extreme example of the small group of informed traders who actually influence prices on Polymarket, while the majority of traders lose money 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 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 lose money in aggregate. The researchers used a novel 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 trade 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 significant implications for our understanding of how prediction markets work, suggesting that it is the informed minority rather than the crowd that drives market accuracy. The activity of skilled traders improves market accuracy, especially in the final stages before resolution, and they are also the first to react to new information. However, the same edge that makes skilled traders valuable to price discovery raises concerns when that information is not public or is not supposed to be.
The paper highlights the risk of insider trading, citing 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.
The accounts collectively made over $630,000, and two of them stopped trading entirely soon after, while the third became mostly dormant. While insider trades are rare and concentrated in a handful of events, they can have a significant impact on prices.
The study's findings challenge the idea that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed minority.