The Social Media Trap: How Hype Shapes Your Trading Decisions
Social media affects trading by deciding what you pay attention to. Research shows that individual traders tend to buy the stocks that grab their attention, such as those in the news or moving sharply, and that heavy, attention-driven buying is often followed by weak returns. For a new trader, the feed can quietly become the strategy.
This article looks at what the research actually says, and how to keep hype out of your decisions.
Attention decides what you buy
In a well-known study, finance professors Brad Barber and Terrance Odean found that individual investors are net buyers of attention-grabbing stocks: stocks in the news, stocks with unusually high trading volume, and stocks with extreme one-day moves.
Their explanation is simple. There are thousands of stocks to choose from, so most people only consider the ones that have already caught their eye. Attention decides the shortlist; preferences only decide what to pick from it.
Social media supercharges this. Your feed is an endless stream of tickers, charts and screenshots, all competing for your attention.
When everyone buys the same thing
A later study by Barber, Huang, Odean and Schwarz looked at users of Robinhood, a popular trading app. They found that these users traded more on attention than other retail investors, often herding into the same stocks at the same time.
The outcome wasn't good: the stocks Robinhood users bought most heavily each day went on to underperform, with average 20-day abnormal returns of −4.7% for the top stocks purchased.
In other words, by the time a stock is everywhere, much of the move may already be over.
Not all advice is equal, and the loudest isn't the best
Researchers Kakhbod, Kazempour, Livdan and Schürhoff studied more than 29,000 "finfluencers" (financial influencers) on the platform StockTwits. They grouped them by how well their advice actually performed:
- About 28% gave advice worth following.
- About 16% were unskilled.
- About 56% were what the authors call "antiskilled": following them would have lost money, around −2.3% in monthly abnormal returns.
The most striking finding: the unskilled and antiskilled finfluencers had more followers and more influence on retail trading than the skilled ones. Popularity and accuracy are not the same thing.
Hype can also be a scheme
Some hype isn't just wrong, it's deliberate. The US Securities and Exchange Commission (SEC) has warned investors that fraudsters use social media to spread rumours and run "pump and dump" schemes: promoters talk a stock up to create a buying frenzy, then sell their own shares into it.
In one widely reported case, US authorities charged eight social media influencers who allegedly presented themselves as successful traders, promoted stocks to their followers, and sold their own shares as prices rose. (These were allegations, not proven findings, at the time they were reported.)
The quieter cost: a distorted picture of trading
Beyond individual trades, social media shows a filtered version of trading: big wins, screenshots, lifestyle. The losses and quiet, uneventful days rarely get posted.
The real picture can look very different. A study of people who started day trading in Brazil's equity futures market found that among those who kept going for more than 300 days, 97% lost money. That's one market and one period, but it's a useful counterweight to a feed full of wins.
This gap between what you see and what's typical can make a patient, disciplined day feel like failure, and push you to trade more, chase moves and take bigger risks.
How to protect your trading from hype
- Know why you're entering every trade. If the honest answer is "I saw it everywhere", skip it.
- Wait before acting on a tip. A short pause, even a few minutes, breaks the urge to chase.
- Write your rules down before the market opens, such as a maximum loss per day and a maximum number of trades, and follow them regardless of what your feed says.
- Log every trade with the reason behind it. Over time, you'll see whether "hype trades" help or hurt you.
- Curate your feed. Mute accounts that mostly post wins and urgency.
- Be suspicious of urgency. "Get in now" is a sales tactic, not analysis.
Key takeaways
- Retail traders tend to buy what grabs their attention, and social media is built to grab attention.
- Heavy, attention-driven buying has been followed by weak returns in research on retail traders.
- The most popular finfluencers aren't necessarily the most accurate, and some hype is outright fraud.
- A written plan, a pause before acting, and an honest trade log are your best defence.
Frequently asked questions
Should I follow trading tips from social media?
Treat them as ideas to research, not instructions. Research on finfluencers found that popularity doesn't predict good advice, and regulators warn that some promotions are pump-and-dump schemes.
Why do stocks that trend online often fall afterwards?
When many people buy because of attention rather than value, prices can be pushed up temporarily. Research on Robinhood users found the stocks they bought most heavily tended to underperform over the following weeks.
How do I stop trading based on hype?
Set your rules before the market opens, pause before acting on any tip, and log the reason for each trade so you can see the pattern. Learn how TruTradr helps.
Sources
- Barber, B. M., & Odean, T. (2008). All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors. The Review of Financial Studies, 21(2), 785–818.
- Barber, B. M., Huang, X., Odean, T., & Schwarz, C. (2022). Attention-Induced Trading and Returns: Evidence from Robinhood Users. The Journal of Finance, 77(6), 3141–3190.
- Kakhbod, A., Kazempour, S., Livdan, D., & Schürhoff, N. Finfluencers. Swiss Finance Institute Research Paper No. 23-30.
- Chague, F., De-Losso, R., & Giovannetti, B. Day Trading for a Living? FGV EESP working paper.
- US Securities and Exchange Commission, Office of Investor Education and Advocacy. Investor alerts on social media and stock rumours (Investor.gov).
This article is for educational purposes only and isn't financial advice.