Unmasking the “Smart Money”: How a Tiny Elite, Not Crowd Wisdom, Drives Prediction Markets Like Polymarket

A recent scandal involving a U.S. soldier arrested for allegedly using classified intelligence to place bets on Polymarket initially appeared to be an isolated incident within the realm of prediction markets. However, new research suggests this soldier might be merely the tip of a much larger iceberg. This provocative study reveals that a select group of “smart money” traders, armed with privileged information, are the true architects of price movements on platforms like Polymarket, leaving a vast majority of retail participants consistently at a loss.

This groundbreaking working paper, co-authored by four distinguished scholars from the London Business School and Yale University, directly challenges the foundational premise of prediction markets: that their accuracy stems from aggregating the “wisdom of the crowd” across a broad participant base.

The research team meticulously dissected every transaction on Polymarket spanning from 2023 to 2025. After analyzing an astounding 1.72 million accounts and a colossal $13.76 billion in trading volume, the academics arrived at a stark conclusion: market prices are predominantly shaped by a minuscule fraction of “informed traders.”

Their findings indicate that a mere 3% of traders are responsible for the overwhelming majority of “price discovery.” In essence, it is this elite 3% that systematically steers prices toward the ultimately correct predictive outcome.

These select traders not only demonstrate an uncanny ability to forecast results accurately but also possess the influence to guide market prices in the right direction. In stark contrast, the remaining 97% of retail investors exhibit virtually no predictive prowess. They primarily serve to provide liquidity and contribute trading volume, consistently finding themselves on the losing side when pitted against the informed few.

Skill or Sheer Luck? Unraveling Trader Performance

Distinguishing genuine skill from pure chance among Polymarket’s millions of users presents a significant challenge. To isolate the element of luck, the research team ingeniously simulated each trader’s betting behavior 10,000 times. All variables remained constant—the same market, the identical time frame, and the exact betting amount—with the sole exception being the betting direction, which was determined by a simple coin toss.

This innovative approach established a crucial baseline for evaluating authentic trading ability. A trader’s true skill was only confirmed if their actual profits consistently outperformed the random outcomes generated by the coin toss. Otherwise, their success was attributed purely to serendipity.

The results were sobering: among those who appeared to be the most profitable winners on paper, a mere 12% genuinely surpassed the “coin toss” benchmark. Even more tellingly, approximately 60% of these “lucky winners” immediately reverted to being losing traders when presented with a different set of prediction events.

Retail Traders: Always a Step Behind

Undeniably, this small cadre of elite traders significantly enhances the overall accuracy of prediction markets. The study observed that when these high-skill players comprise a larger proportion of transactions, prices tend to align more closely with the eventual truth, a phenomenon particularly pronounced during the critical final stages before an event’s outcome is revealed.

Moreover, their sensitivity to new information is remarkably acute. Whether it’s a major policy announcement from the U.S. Federal Reserve or a company’s earnings report, this “smart money” reacts instantaneously, swiftly adjusting their positions. In stark contrast, ordinary retail investors often appear sluggish and largely unresponsive to these market-moving events.

The Persistent Shadow of Insider Trading: Precision Strikes for Massive Gains

However, this pronounced “information advantage” inevitably raises serious questions about legal and ethical boundaries, especially if the information is not publicly available or, worse, constitutes leaked classified intelligence.

The research highlights a particularly contentious case: a hypothetical U.S. military operation in January 2026 aimed at overthrowing Venezuelan President Nicolás Maduro. Hours before this operation was supposedly initiated, three enigmatic accounts on Polymarket aggressively placed substantial bets on contracts predicting “Maduro will be overthrown.” At the time, the market assigned only a 10% probability to this event, yet these accounts committed tens of thousands of dollars before any price movement occurred.

When news of the alleged coup broke and the event seemingly materialized, these three accounts collectively amassed over $630,000. Following their windfall, two of the accounts immediately ceased trading, and the third became largely inactive. While no definitive evidence currently links these accounts to illegal activities, this incident vividly illustrates the profound impact of “non-public information” on prediction market prices.

The study further reveals that funds suspected of insider trading exert a price-driving force 7 to 12 times greater than that of typical professional traders. Nevertheless, the research also clarifies that such extreme instances of insider trading are relatively rare, typically concentrated around a few specific events, and do not represent the primary engine of daily market operations. For the most part, market accuracy still relies on the consistent profitability of seasoned traders.

In conclusion, this pivotal research definitively dismantles the romantic notion that “prediction markets thrive on the wisdom of the crowd.” Instead, their remarkable accuracy is not a product of widespread public consensus but rather the calculated maneuvers of a “select few who possess critical, often privileged, information.”