Study Reveals Minority of Informed Traders Drive Accuracy in Prediction Markets

A recent scandal involving a Green Beret who allegedly bet on a classified U.S. raid using a prediction market may be more than an isolated incident. According to a new study, it could be a symptom of a larger issue, where a small group of informed traders, like the accused soldier, significantly influence market prices on platforms like Polymarket, while the majority of participants incur losses. The study, conducted by researchers from the 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 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 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, using the same markets, moments, and dollar amounts, 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 coin flip benchmark, suggesting that many apparent winners may have been lucky rather than skilled. The study also found that when skilled traders account for a larger share of trading, market accuracy improves, particularly in the final stages before an event's resolution. Furthermore, these traders tend to be the first to react to new information, such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be trading on non-public information. The researchers highlight a specific case where three newly created Polymarket accounts placed large bets on a contract related to the U.S. removal of Nicolás Maduro from power in Venezuela, just before the operation. The accounts collectively made over $630,000, but there is no evidence of wrongdoing. The study concludes that insider trades, while rare and concentrated in a few events, can move prices more aggressively than typical skilled trades. Nevertheless, the market's accuracy is still largely dependent on repeat traders who consistently outperform, rather than one-off bets. The findings challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed minority.