Who wins and who loses in prediction markets? Evidence from Polymarket

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6443103

by vcf • 2 months ago

173 155 2 months ago

papers.ssrn.com

vcf13• 2 months ago

We study trading gains and losses on Polymarket, the largest prediction market. Using 588 million trades ($67 billion in volume), we show that the gains are highly concentrated: the top 1% of users capture 76.5% of profits. Successful traders provide liquidity using limit orders that resolve favorably relative to realized outcomes while unsuccessful traders take liquidity using market orders. Monthly performance is weakly persistent, however, this may represent sample selection rather than skill. A detailed analysis of the trading behavior of the most successful accounts suggests that "insider'' trading is unlikely to explain the performance of the largest winners.

Full dataset available at https://huggingface.co/datasets/vgregoire/polymarket-users

wutwutwat2• 2 months ago

insider trading on events probably wouldn't show any trends, right? These are point in time events (they call them markets), but they are finite and short lived. An insider would be a one and done thing, so it would be pretty hard to spot them or trend any sort of month over month insider scheming imo.

Also...

We study trading gains and losses on Polymarket, the largest prediction market

This is not a natural thing to say and I fucking hate that it's impossible to know anymore if I'm wasting time replying to an AI/bot or not

philipwhiuk• 2 months ago

I agree - you're not going to be an insider on a significant proportion of trades and it would be stupid to use the same account for more than a couple.

Insiders are going to be earning large amounts in single trades, either by betting a lot when it's odds-on or a small amount when it's out the odds (for a large return).

I think it's just bad tense, which I think makes it not AI amusingly.

vcf13• 2 months ago

Not meant to sound like AI, but most academic journals limit abstracts to 100 words, so they rarely feel natural...

I agree: insiders are hard to study because they are finite and short-lived. We're pretty confident there are insiders out there trading on Polymarket; however, our conclusion is that they don't account for a significant fraction of the total trading gains on the platform.

LPisGood• 2 months ago

For what it’s worth that’s a sentence I would write if that were my paper and I was writing the abstract.

redox99• 2 months ago

The spreads on most markets always seemed like a hint that polymarket transferred wealth from the impatient that don't really understand how it works, to those that play mostly as patient market makers with just an educated guess.

The problem is that volume is generally too low to make significant money.

superfrank2• 2 months ago

I'm not saying this as an argument for or against prediction markets, but that's essentially what the vig is at traditional sportsbooks.

Someone calculates what they think the odds of an outcome happening are and then they allow people to take positions on either side at worse odds than what they think the real odds are. As long as their prediction is correct, over time they make money. It's why putting $1 on a 50/50 bet on a sportsbook will usually only pay out around $1.91 instead of $2 if you win.

chmod775• 2 months ago

The only time I'd trade on that platform is when I have information others don't. I assume that is also true for those 1% farming suckers.

graemep• 2 months ago

That sounds as though the successful traders are informally acting as market makers and are rewarded for doing that.

vcf13• 2 months ago

Yes. It's not only that, as we also find very successful traders who take directional bets on elections and sports. But among the most successful traders, a large fraction are acting as market makers. Note that acting like one is not enough. We also find many traders acting as market makers among the least successful, yet they don't lose as much as the top winners do.

zero_bias• 2 months ago

Actually it’s pretty explicitly stated, polymarket even have special docs section, "market maker guide"

SamTinnerholm• 2 months ago

[flagged]

empath75• 2 months ago

There's probably also some hedging going on across accounts that look like directional bets.

postflopclarity8• 2 months ago

this comment was clearly written by AI. please don't do that.

Retr0id6• 2 months ago

Not sure why you were downvoted/flagged, because you're right. It is also quite an insightful comment worthy of discussion so I'm a little conflicted.

SkyPuncher• 2 months ago

Yes, there's an em-dash, but it reads fine to me.

vcf13• 2 months ago

We have a grad student working on matching markets across venues. Not a trivial task at scale, but we hope to look at that eventually.

meric_• 2 months ago

I'd be very cautious how matching works. For some markets like sports it's trivial, but many politics or economics markets have minute rule differences that dramatically change what the actual market is betting on. Many markets have identical titles but are actually totally different markets.

locallost4• 2 months ago

I don't think that's surprising because the alternative would be that some people are able to predict the future. Whatever strategy one might figure out that works is long term destined to fail, as other people start using them. The only real way to make money there is by providing liquidity since it's a zero sum game. For the stock market this is not true because it's not zero sum, it grows over time.

vcf13• 2 months ago

Yes, but the alternative (that some people are very good at forecasting) is also plausible. It's also useful to have a good prediction model and timely data sources when providing liquidity. We also find that some of the "biggest losers" also provide liquidity; they just aren't as good at it.

Retr0id6• 2 months ago

"predicting the future" and "correct analysis of all available information" often aren't all that different.

cortesoft• 2 months ago

There is alternative to being “able to predict the future”, which is “I already know the future” or “I can change the future”

dheera3• 2 months ago

The stock market is arguably zero sum as well, just that directionally betting on the US has generally worked during the golden years of the US economy.

The stock markets of the world aren't a money printer.

tsimionescu3• 2 months ago

There are some bets on prediction markets where the future is either already known or in the control of people who may be participating in the market. For example, when people bet on how long the next presidential briefing will be, it doesn't take a prophet to predict this, anyone who organizes said briefing can control it (at least with a very high probability).

So, the question becomes "what is the preponderence of such bets" and "how many people with control or knowledge of bet outcomes actually participate in the market" - not "can some people see the future of any bet better than others".

WalterBright• 2 months ago

I couldn't make heads or tails of that prose.

postflopclarity8• 2 months ago

because it's AI slop

Karrot_Kream• 2 months ago

I don't know why cross venue arbitrage would be unskilled? There's a lot of it for the taking and I, and others, do so.

dang• 2 months ago

Could you please not post generated comments to HN? It's not allowed here. See https://news.ycombinator.com/newsguidelines.html#generated and https://news.ycombinator.com/item?id=47340079. We ban accounts that do this and I don't want to ban you, so please write everything that you post to HN by hand.

Of course, it's impossible to know for sure what was LLM processed or not, but we're getting complaints about some of your posts and, upon inspection, the complaints seem justified.

goncalo-r• 2 months ago

What's the baseline here - in a world where every person is betting randomly X times a month, what would the distribution look like? There'd still be a small percentage that wins most of it, right?

vcf13• 2 months ago

We don't know the exact benchmark, but your insight is correct. We provide a simulation similar to what you have in mind towards the end of the paper, but you can generate almost any distribution you want by fine-tuning a simulation...

Terr_• 2 months ago

To relate it to a more-general economic article that has stuck with me for a while:

If you simulate this economy, a variant of the yard sale model, you will get a remarkable result: after a large number of transactions, one agent ends up as an “oligarch” holding practically all the wealth of the economy, and the other 999 end up with virtually nothing.

https://www.scientificamerican.com/article/is-inequality-ine...

manas962• 2 months ago

Just curious but how are bets arbritated on these website?

Meaning who decides if an outcome was yes or no? Answers to things like "Who will win the next Best Picture Oscar?" are fairly obvious and binary.

Can we make bets whose answers are not binary yes/no?

What about "Will celebraty X and Y break up?"? Does Polymarket go to X and Y to confirm if they broke up or something :D

matusp• 2 months ago

https://docs.polymarket.com/concepts/resolution

manas962• 2 months ago

Interesting. Any (in)famous UMA vote debates? Or interesting Unknown/50-50 outcome resolutions?

superfrank2• 2 months ago

The rules for each contract are provided when you bet, but ultimately there are plenty of markets that are settled in controversial ways and users have little recourse because the sites TOS's often say their rulings are final (this is the same for many sports books as well).

To give an example, I wagered on a market a while ago that Trump would say "Mamdani" before the end of the week. He responded to a question Mamdani where the reporter asked about the mayor by name and Trump said "Mandami" instead of "Mamdani" (switched the m and n). Kalshi ruled that that didn't count as Trump having said the word.

Trump ultimately said Mamdani correctly the next day so it ended up not mattering and I think the rules have since been updated to accept obvious mispronunciations, but I think it's a good example of how much gray area some of these markets can have.

fontain• 2 months ago

There’s a lot of talk about corruption in UMA but I think it is oversold as a problem. UMA is just a scapegoat for Polymarket’s desired outcome.

Polymarket implemented the “independent” truth process with UMS following regulatory scrutiny but they still decide the outcome.

https://reticulating.substack.com/p/polymarket-isnt-a-predic...

perlgeek• 2 months ago

the top 1% of users capture 76.5% of profits

This seems to be similar to OnlyFans, and the economy at large...

vcf13• 2 months ago

Yes, power laws are everywhere. The exact shape of each distribution varies, however, and little is known empirically about the distribution of trading profits in financial markets.

amelius6• 2 months ago

Yeah if you look at the Boltzmann Wealth Model, where every actor gives away 1 dollar to a random person, and you repeat this, then if you start with an equal wealth distribution, you end up with an exponential wealth distribution. That shows how strong exponential curves are :) A few "lucky" individuals become very wealthy, while the vast majority of people end up with very little or nothing.

The effect is so strong that I'm starting to wonder if we should have laws against power laws, like we have in engineering when we try to make things stable.

fantasizr3• 2 months ago

these apps should load with this pie chart showing your likelihood of ever making a profit based on what they know about you. "YOU WILL LOSE MONEY ON THIS APP". Like the cigarette packs.

solarkraft• 2 months ago

This is (possibly what you’re thinking of) a requirement in the EU for CFD trading providers. Providers have to (somewhat prominently) state in all of their ads what percentage of traders loses money using the product.

AlienRobot• 2 months ago

Just look at lotteries.

I don't believe in them because when you consider operational costs, less money comes out of the lottery than goes in, so if everyone simply didn't bet on the lottery, they would have more money than if they bet on it.

But everyone who bets thinks "but what if I win?"

giarc• 2 months ago

MLMs were forced to do this but it doesn't seem to change their recruitment ability.

dwa35922• 2 months ago

Wait- why isn't there any conflict of interest statement provided in this paper?

vcf13• 2 months ago

Because it's not required and not common practice in our field at this stage. But none of us (I'm one of the authors) is affiliated with or has a financial interest in any prediction market platform.

dwa35922• 2 months ago

Thanks for the clarification. Given the scrutiny on these platforms, this is timely done. Thanks.

HWR_14• 2 months ago

Isn't it common practice and required to disclose a conflict of interest? Just not to explicitly say there are none.

tim-star• 2 months ago

the market wins

emsign• 2 months ago

In terms of damage to society it's irrelevant who the winners are within the Polymarket system, it matters how much the insiders playing on Polymarket have an effect to the outside world of politics and economics. If Polymarket gambling increases corruption and destructive effects on society it simply has to be regulated or made illegal.

janalsncm2• 2 months ago

We find that the most successful users traded frequently in sports markets, often for different teams (81% of the gains)

Am I missing something or is this almost the whole story? Sports betting apps ban users who are too successful. Polymarket doesn’t.

So if you have a killer football game prediction algorithm you’ll only be able to use it for so long on sports betting apps, but Polymarket won’t ban you. Plus the apps will limit the size of the bets you’re allowed to make.

ericmcer• 2 months ago

I always wondered if you could compare odds on the most advanced sports betting apps and those on futures markets and exploit any big diffs between the two.

hunterpayne6• 2 months ago

There are people who have been doing this in Vegas for years.

dnnddidiej• 2 months ago

That makes you a profitable bettor, so your accounts will get restricted. Best way to make money is if you have better predictions then bet on markets like totalisers, betfair etc. not with casinos or bookmakers.

feurio• 2 months ago

I have absolutely zero knowledge about the area, but doesn't Polymarket just set up bets between users?

If you're a regular bookmaker, who is on the hook for any losses, then yes you would ban successful users. But in this case you just skim off a fee for each "trade" so there's no incentive to ban anyone.

elkrapo• 2 months ago

It doesn't seem surprising that being a bookmaker in your behavior on sports is a big win since many people bet on identity instead of information in sports and with small bets/attention. It's interesting in that the pattern could have turned out to apply immediately across everything or something.

hunterpayne6• 2 months ago

The most money can be made in markets which have the worst correlation between reality and the market price. There are types of markets on PM which are very far from reality. There are types of markets which are very close to reality. It isn't surprising that sports markets are in the first category.

There are also political markets, where it is clear campaigns manipulate the prices for the same reasons they will publish polls showing they are gaining or ahead. The CA governor market is especially far from reality. This is compounded by the fact that Americans can't trade this market so the distance from reality is especially bad for American election markets.

That being said, that most people don't make money on PM isn't surprising. The same thing is true for most markets. You only invest (business) time into something if you are getting a return. So those that are actually good at making predictions put the time into making trades, so they are the bulk of the trades and the bulk of the profit. Same thing happens with day traders on the equity markets.

pinkmuffinere2• 2 months ago

There are types of markets on PM which are very far from reality. There are types of markets which are very close to reality. It isn't surprising that sports markets are in the first category.

I think you're claiming here that sports markets are "very far from reality". What do you mean by that? Scores, injuries, fouls, etc are very well documented and objective things, so I can't figure out what you mean by "far from reality". If anything, these markets seem exceptionally "real", with well defined criteria and outcomes.

whattheheckheck• 2 months ago

Interactive brokers have prediction markets open to usa people

Aurornis2• 2 months ago

Sports betting apps ban users who are too successful. Polymarket doesn’t.

Polymarket is set up as a market between users. Someone has to be on the other side of the trade.

With betting apps, the house is on the other side of the trade. If you're too good they choose not to trade with you.

The alternative for the betting apps is to give worse payouts to everyone to cover for the wins of the long-tail experts. This would degrade the experience for the average bettor on the platform. Maybe that would be a good thing because it would discourage them from playing, but I digress.

EdKaim2• 2 months ago

Great paper. Still digesting after a first pass, but it looks really solid.

Quick question: did your team consider the implications of capital recycling on the maker side? Liquidity providers tend to have superior tech and information, so the general edge is expected. However, the ability to effectively reuse the same capital to sell outcome sets seems like it could offer a scale advantage that enables them to capture even more opportunity. On the other side, takers expressing directional views have their capital committed to one position at a time. Do you think this contributes to the gains being so concentrated among them?

vcf13• 2 months ago

Thanks! No, we haven't looked at the capital "locked" in these markets (which is important considering there is no margin trading, at least not yet). Most markets have a short horizon, but some have very long ones. It gets very complicated very quickly because it's not always the case that you open a position and then close it (you get partial fills, users closing partial positions, etc.). Taking that into consideration would make liquidity providers look even better than they do in our study. Not having their capital locked allows liquidity providers to trade more and earn more per trade on average. Trading on margin would allow liquidity takers to lose more money more quickly (this is an educated guess; you never know what the outcome of a new policy would be until you implement it).

EdKaim2• 2 months ago

The long horizon ones are also interesting on Polymarket because the vast majority don't have APY. As a result, prices should be discounted, but sum-to-1 doesn't allow for it. I'd expect a negative skew to the performance of traders willing to take those inflated prices (relative to what the odds DCF imply they should be). But there's also no upside for makers, so liquidity is pretty thin.

orsenthil2• 2 months ago

If the prediction markets are between people, why do people bet against the mostly likely outcome at all ?

Real anecdote. For e.g, during Superbowl 2026. The markets were allowed bets to be placed until 6 minutes to close, when Seahawks were way ahead of New England Patriots. The probablity of Seahawks winning was almost 99% and any person who places a 1000 dollar bet will make 1100 in 6 minutes. Where is the 100 dollar going to come from? Who loses that?

philsquared_• 2 months ago

$1000 would return $1010. The money comes from people who want to close their trades early rather than wait for the market to settle. Often times no one actually takes these offers and then it just sits in the order book.

orsenthil2• 2 months ago

wow! excellent explanation. Thank you!

moezd• 2 months ago

So the market is still being built: Whales come in with educated guesses, use limit orders like responsible adults and take cash home. Daredevils, amateurs and gambling addicts come in, go all-in and try to time the market, which probably never works. %1 -> 76.5% is huge, in terms of Gini coefficient it's like living in Brazil, right?

Who wins and who loses in prediction markets? Evidence from Polymarket

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