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, conducted by academics from London Business School and Yale, found that a small group of informed traders is responsible for driving price discovery in prediction markets, while the majority of participants tend to lose money.
The study analyzed over 1.7 million accounts and $13.76 billion in trading volume on Polymarket, revealing that just 3% of traders account for most of the price movement, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders provide liquidity and generate volume but tend to be on the losing side of trades. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, finding that only 12% of the biggest winners by raw profit consistently outperformed the benchmark. The findings suggest that skilled traders play a crucial role in improving market accuracy, particularly in the final stretch before resolution, and are often the first to react to new information.
However, the study also raises concerns about the risk of insider trading, citing a concrete example of three newly created Polymarket accounts that made unusually large bets on a contract related to the US removal of Nicolás Maduro from power in Venezuela. While the study's findings challenge the idea that prediction markets work due to the wisdom of the crowd, they highlight the importance of informed traders in driving market accuracy.