Research Reveals That Only a Small Percentage of Informed Traders Drive the Accuracy of Prediction Markets

A recent scandal involving a Green Beret accused of betting on a classified US raid may be more than an isolated incident, according to a new study. The research suggests that this individual may be an extreme example of a small group of informed traders who significantly influence 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 over 1.72 million accounts and $13.76 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 correct 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. Distinguishing between skill and luck is a challenging task, as many traders may accumulate significant winnings by chance alone. To address this issue, the researchers simulated each trader's bets 10,000 times, reversing the direction of the trades to establish a benchmark for what their profits would look like without any real edge. The results show that among the top winners by raw profit, only 12% outperformed the benchmark, and approximately 60% of 'lucky winners' eventually became losers when their performance was evaluated against a separate sample of events. The activity of skilled traders enhances market accuracy, causing prices to move closer to the correct outcome, especially in the final stages before resolution. They are also the first to respond to new information, adjusting their positions in reaction to events such as Federal Reserve announcements or corporate earnings, whereas other traders exhibit little consistent reaction. However, the same expertise that makes skilled traders valuable to price discovery raises concerns when that information is not publicly available or is not supposed to be. Both Polymarket and Kalshi have explicitly stated that trading on non-public information is strictly prohibited. The study cites a concrete example of this risk, involving the US 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 accounts ceasing trading activity soon after and the third becoming largely dormant. Although there is no evidence of any wrongdoing on these accounts, insider trades, when they do occur, tend to move prices more aggressively per dollar, approximately seven to 12 times more than typical skilled trades. Nevertheless, such trades are rare and concentrated in a handful of events, rather than being the primary driver of price discovery. The study's findings challenge the notion that prediction markets function due to the collective knowledge of their participants, instead suggesting that they work because of the presence of informed traders.