A study published by researchers from London Business School and Yale has shed new light on the dynamics of prediction markets. Contrary to the widely-held belief that the collective knowledge of participants drives market accuracy, the study suggests that a mere 3% of traders are responsible for the majority of price discovery. These informed traders consistently demonstrate an ability to predict outcomes and adjust prices accordingly, while the remaining 97% of traders tend to lose money in their transactions. The study analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket between 2023 and 2025, providing valuable insights into the inner workings of prediction markets.
To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, reversing the direction of their trades. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the simulated results, indicating that skill plays a significant role in their success. Furthermore, the study found that the activity of skilled traders improves market accuracy, particularly in the final stages before an event's resolution.
They are also the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings. However, the study also raises concerns about the potential for insider trading, citing a concrete example where three newly created Polymarket accounts placed large bets on a contract related to the U.S. removal of Nicolás Maduro from power in Venezuela.
The accounts collectively made over $630,000, prompting questions about the source of their information. While the study's findings challenge the conventional wisdom that prediction markets work due to the collective efforts of the crowd, they highlight the importance of informed traders in driving market accuracy.