Study Reveals Only a Small Percentage of Traders Contribute to Prediction Market Accuracy

A recent scandal involving a Green Beret allegedly betting on a classified U.S. raid may be more than an isolated incident, according to a new study. The research suggests that this individual may represent an extreme example of a small group of informed traders who significantly influence prices on platforms like Polymarket, while the broader crowd incurs 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 correct direction. In contrast, the remaining 97% of traders largely 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 factors 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, while many apparent winners did not sustain their performance over time. The study also found that when skilled traders account for a larger share of trading activity, prices tend to move closer to the correct outcome, particularly in the period leading up to the resolution of an event. Furthermore, these traders are often the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders exhibit little consistent response. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be trading on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The researchers highlight a concrete example of this risk, citing the U.S. removal of Nicolás Maduro from power in Venezuela in January. In the days and hours leading up to the operation, three newly created Polymarket accounts placed unusually large bets on a contract asking whether Maduro would be removed, with the market pricing the odds at around 10% at the time. When the raid occurred, the accounts collectively made over $630,000, with two of the accounts stopping trading entirely soon after and the third becoming mostly dormant. While there is no evidence of wrongdoing on these accounts, the incident underscores the potential risks associated with insider trades. The study's findings challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants. Instead, they suggest that the accuracy of these markets is driven by the presence of informed traders.