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 represent 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 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 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 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, using the same markets, moments, and dollar amounts, but with the direction of the bet determined by a coin flip. The results showed that among the biggest winners by raw profit, only 12% 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 an event's resolution. Furthermore, the research highlights the risks associated with insider trading, which can have a disproportionate impact on market prices.
The study's conclusions challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they are driven by the actions of a small group of informed traders.