Memes are not a harmless, childish distraction; they have a real impact on investor behaviour and could be clouding the judgment of Reddit investors.
A new study, Are Memes a Sideshow: Evidence from WallStreetBets, finds a clear link between online meme activity and trading behaviour. Memes are used as a humorous coping mechanism, with meme activity surging when companies issue disappointing earnings. Memes “lead to a surge in virality and engagement in the discussion” of individual stocks.
Highly-memed stocks get more social media activity, “often encouraging investors to hold on to them”. Retail investors place fewer sell orders of highly-memed stocks, delaying the market’s response to bad news.
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