The study examined how Robinhood’s trading platform influences its users’ behavior, primarily when the platform is boosting “attention-induced trading.” The study looks at whether or not the users are impulsive and “herd-like,” as they are driven by Robinhood’s user interface of emphasizing the most “relevant” stocks. Many of Robinhood’s users are first-time investors and lack fundamental knowledge on evaluating a stock instead of diving into a stock like a videogame. Moreover, many of Robinhood’s traders trade on the extreme sides of stocks, winning and losing, as they also tend to discuss attention-grabbing trades on Reddit and WallStreetBets. As a result, Robinhood traders fuel rapid stock growth, but then the stock price declines as the stock loses pressure/momentum from the community.
The most intriguing finding between Robinhood’s trading volume and general stock performance is that when a stock’s Robinhood user base grows in a single day, the stock loses money throughout the month. Specifically, at a 10% increase in users, the herding events generate a -1/8% loss. And at a 750% increase in users, the herding events generate a -19.6% loss. This means Robinhood traders participate in unsustainable trading that usually ends in a huge decline for a stock. Robinhood traders are simply buying stock on attention, not on any value. This method is different from traditional investing since these kinds of investors are buying and holding solid, reputable stocks for years to come.
I believe the most thought-provoking aspect of the study is how digitization and user interface can shift investing towards “gaming,” which is occurring in Robinhood. When accounting for the fact that most Robinhood users are trading on impulse and relevance, hold less diverse portfolios, and are more active than average, it is safe to conclude that Robinhood is not encouraging people to be financially responsible with their investments.
Works Cited
Barber, Brad M., et al. “Attention-Induced Trading and Returns: Evidence from Robinhood Users.” The Journal of Finance, vol. 77, no. 5, October 2022, pp. 1-50.
Written by Mikael La Ferla
Mikael La Ferla 