If people with more information profit at the expense of people with less information, isn't that exactly how things are supposed to work?

If you're approaching a market with hard facts, detailed comparisons and solid evidence; while I'm trading in the same market based on vibes and intuition, surely it's expected that your returns would be better, and mine worse?

Short answer, no. If you're betting on an outcome that can be controlled by an individual or small group, the incentive is for them to game the system by doing the OPPOSITE of what the prediction is so as to make the most money.

"When a measure becomes a target, it ceases to be a good measure"

https://en.wikipedia.org/wiki/Goodhart%27s_law

If you’re betting with a friend that they won’t have chicken for dinner, what’s to stop them from having chicken for dinner? What if you bet with a complete stranger who also took the reverse of that bet from your friend?

A fact is a statement about past. A bet is contingent on the future.

Insiders can change the facts.

You're confusing collusion with being informed. The concept of market rationality is based on the premise that all participants in said market more or less have access to the same information. Fools can choose to not be informed before making a trade, but passing along sensitive information that contradicts market rational behavior causes people to lose trust in the market.

Perfect example from today. Allbirds just announced that they're going all in on AI infra, skyrocketing the stock. Had I bought a million dollars worth of Allbirds yesterday, everyone would think I'm an idiot. But now, they would think I have insider information and would no longer want to participate because it would make no sense to buy Allbirds yesterday unless I knew the announcement was coming.