Study Reveals Only a Small Percentage of Informed Traders Drive Accuracy in 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, conducted by Roberto Gómez-Cram, Yunhan Guo, Theis Ingerslev Jensen, and Howard Kung of London Business School and Yale, indicates that a small group of informed traders is responsible for the accuracy of prediction markets, including Polymarket. By analyzing 1.72 million accounts and $13.76 billion in trading volume, the authors found that just 3% of traders drive price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders tend to lose money, providing liquidity and generating volume, but ultimately being on the wrong side of trades against the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, using a coin flip to determine the direction of the trade. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, while many apparent winners did not sustain their performance over time. The study's findings have significant implications for the functioning of prediction markets, suggesting that the activity of skilled traders improves market accuracy, particularly in the final stages before resolution. However, the same edge that makes these traders valuable to price discovery also raises concerns about the potential for insider trading, especially when non-public information is involved. The researchers highlight a concrete example of this risk, citing 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 insider trades are rare and concentrated in a handful of events, the study's findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead suggesting that they rely on the informed decisions of a select group of traders.