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 the small group of informed traders who drive prices on platforms like Polymarket, while the broader crowd incurs losses. The study, conducted by researchers from 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 most price discovery, consistently predicting outcomes and moving prices in the right 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. 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 trade determined by a coin flip.
The results showed that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, while many apparent winners were later revealed to be lucky. The study also found that when skilled traders account for a larger share of trading, prices move closer to the correct outcome, especially in the final stretch before resolution. Furthermore, these traders are the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders show little consistent reaction. However, the same edge that makes skilled traders valuable to price discovery raises concerns when that information is not public or is not supposed to be.
The paper cites 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 outcome before the event, collectively making over $630,000. While there is no evidence of wrongdoing, the incident highlights the risk of insider trades, which can move prices aggressively. The study's findings challenge the idea that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed traders who drive price discovery.