A recent scandal involving a Green Beret who was 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 this individual may represent an extreme example of a small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of users incur losses. The study, conducted by researchers from London Business School and Yale, analyzed over 1.7 million accounts and $13.7 billion in trading volume on Polymarket between 2023 and 2025.
The findings indicate 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 generally do not exhibit this level of accuracy, instead providing liquidity and generating volume, but ultimately losing money to the informed minority. Distinguishing between skill and luck is a significant challenge, as many traders may accumulate substantial winnings by chance alone. To address this issue, the researchers simulated each trader's bets 10,000 times, altering only the direction of the trade.
By comparing the actual results to the simulated outcomes, they were able to determine whether a trader's success was due to skill or luck. The results show that among the top winners in terms of raw profit, only 12% outperformed the simulated benchmark, and many apparent winners did not sustain their performance over time.
The activity of skilled traders has a positive impact on market accuracy, causing prices to move closer to the correct outcome, particularly in the period leading up to the resolution of an event. These traders are also the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings reports.
However, the same expertise that makes these traders valuable to price discovery raises concerns when they are acting on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited.
The study highlights the risks associated with insider trading, citing the example of the U.S. removal of Nicolás Maduro from power in Venezuela. In the days and hours preceding the operation, three newly created Polymarket accounts placed unusually large bets on a contract related to the event, collectively earning over $630,000. While there is no evidence of wrongdoing in this specific case, the incident illustrates the potential for insider trading to influence market prices.
The research findings challenge the conventional wisdom that prediction markets are accurate 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 who consistently outperform the majority of users.