Study Reveals Only a Small Percentage of Traders Drive Accuracy in Prediction Markets

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 case could be an extreme example of the small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of users 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 show that just 3% of traders are responsible for most of the price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders do not exhibit this level of skill, instead providing liquidity and generating volume, but ultimately losing money to the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, with the direction of the bet determined by a coin flip. The results indicate that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, suggesting that many apparent winners may have simply been lucky. The study also found that when skilled traders account for a larger share of trading, prices tend to move closer to the correct outcome, especially in the final stages before resolution. Furthermore, these traders are often the first to react to new information, such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be trading on non-public information. The researchers highlight a specific case in which three newly created Polymarket accounts placed large bets on the removal of Nicolás Maduro from power in Venezuela, collectively making over $630,000 when the event occurred. While there is no evidence of wrongdoing in this case, the study suggests that insider trades can have a significant impact on prices, albeit rarely. Overall, the findings challenge the notion 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.