With more than 6,000 stocks listed on the New York Stock Exchange and NASDAQ, how does anyone decide which ones to talk about, research, or buy? For the millions of retail investors who gather in online communities like Reddit’s wallstreetbets, the question is more than academic. Their collective attention can move markets, as the 2021 GameStop short squeeze famously demonstrated.
A new investigation published in the Journal of Behavioral Finance set out to identify the patterns behind these decisions. The researchers wanted to know whether a well-known psychological theory about how people evaluate risk could predict which stocks everyday investors choose to discuss online. Their answer: yes, and the effect is strong.
A classic theory meets a modern platform
Felix Reichenbach and Martin Walther, researchers at Technische Universität Berlin (with Walther also affiliated with the German International University), based their work on a framework called cumulative prospect theory, developed by psychologists Daniel Kahneman and Amos Tversky. The theory describes how people actually make choices under uncertainty, which often differs from what traditional economic models predict.
In simple terms, the theory says three things about how humans evaluate gambles or investments. First, people feel the pain of losses more sharply than the pleasure of equivalent gains. Second, people judge outcomes against a reference point (like the market average) rather than in absolute terms. Third, and most relevant here, people tend to overweight rare, extreme events, both good and bad. That’s why the same person might buy a lottery ticket and also buy insurance. The tiny chance of a jackpot feels bigger than it really is, and so does the tiny chance of disaster.
Applied to stocks, this suggests that investors should be drawn to shares with “lottery-like” features, meaning stocks that have occasionally produced huge gains, even if those gains are statistically unlikely to repeat. Past laboratory experiments have supported the theory, but evidence from real financial behavior outside the lab has been thin.
Mining millions of Reddit posts
To test whether the theory actually describes what retail investors do, the researchers turned to three of Reddit’s largest finance communities: wallstreetbets, investing, and stocks. Combined, these forums represent more than 14 million users. Using a tool called the Pushshift Reddit API, the team collected posts from 2012 through August 2022.
Not every post is a recommendation, so they had to filter. Using text-recognition software, they identified which stock tickers were mentioned in post titles. Then they ran each post through a sentiment-analysis algorithm called VADER, customized with financial vocabulary and common Reddit slang (including emojis), to classify whether the poster was expressing a positive view about the stock.
On the financial side, the team calculated a prospect-theory score for every stock listed on the NYSE and NASDAQ, for every trading day in the study window. They did this using historical return data, following an approach established by researchers Nicholas Barberis, Abhiroop Mukherjee, and Baolian Wang. They ran the calculation two ways: once using daily returns from the previous year, and once using monthly returns from the previous five years. They also ranked stocks by three other characteristics commonly used in finance research: market capitalization (company size), price-to-book ratio (a measure of how expensive a stock is relative to its accounting value), and momentum (how well the stock performed over the past year).
Each trading day, every stock received a ranking from lowest to highest on each measure. The researchers then checked: when Redditors posted positively about a stock, where did that stock tend to sit in these rankings?
What the data revealed
The pattern was striking. Stocks in the top 10 percent of prospect-theory scores accounted for a disproportionate share of positive Reddit posts, in some specifications up to 50 percent of all such posts. If attention were distributed evenly, each decile would capture about 10 percent. Instead, attention piled up at the extremes.
Momentum told a similar story. More than half of all positive posts concerned stocks that had been among the top performers over the previous year. Since high momentum and high prospect-theory scores are closely related (both reward strong recent returns), the researchers ran additional tests to tease them apart. Even after accounting for momentum, the relationship between high prospect-theory scores and Reddit attention remained visible, though weaker.
Market value and price-to-book ratio showed different patterns. Larger companies received somewhat more attention, but the effect was modest. Price-to-book ratio produced a “U-shape”: Redditors discussed both very cheap stocks (low price-to-book) and very expensive growth stocks (high price-to-book) more often than those in the middle. This fits with the meme-stock phenomenon, where communities targeted heavily shorted cheap stocks like GameStop and AMC, while also enthusing over growth names like Tesla and Palantir.
Across the board, extreme values (whether highest or lowest) drew more attention than middle-of-the-pack stocks. The researchers ran a series of robustness checks, including using different reference points for the calculations, different parameter estimates, and a stricter cutoff that excluded very small companies. The core finding held up.
What this means for businesses and investors
For corporate managers, the findings suggest a practical warning. Companies whose stocks display the traits that attract Reddit attention (extreme recent returns, very high or very low price-to-book ratios, strong momentum) may be more vulnerable to sudden social-media-driven price swings, including short squeezes that can inflict major losses on short sellers. The authors also note that companies with these characteristics might find social media a useful channel for reaching potential investors.
For individual investors, the results offer a mirror. The stocks that feel most exciting to discuss online are often those with extreme recent histories, which is precisely the pattern that cumulative prospect theory predicts will lead to overvaluation and lower future returns. Earlier research by Barberis, Mukherjee, and Wang found that stocks with high prospect-theory values tend to underperform afterward.
Several caveats apply. The study documents a correlation between stock characteristics and Reddit attention, not a direct cause. The researchers cannot rule out other drivers like traditional news coverage or corporate announcements. And Reddit users are not representative of all retail investors; they skew young and may have distinct preferences. Still, as a window into how millions of people allocate their limited attention in financial markets, the patterns are hard to miss.
