Study Reveals Only a Tiny Fraction of Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret arrested for 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 actually influence prices on platforms like Polymarket, while the majority of participants incur losses. The study, conducted by researchers from 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 right direction. In contrast, the remaining 97% of traders provide liquidity and generate volume but ultimately end up 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 variables constant except for the direction of the bet. The results showed that among the biggest winners, only 12% outperformed the benchmark, and 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, market accuracy improves, especially in the final stages before resolution. Furthermore, these traders are the first to react to new information, adjusting their positions in response to events like Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they trade on non-public information. The researchers cite the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed unusually large bets on the contract before the event, collectively making over $630,000. While there is no evidence of wrongdoing, the incident highlights the risk of insider trading. The study concludes that prediction markets work not because of the collective knowledge of the crowd, but because of the informed traders who drive price discovery.