Working Paper2025SSRN

The Rise of Reddit: How Social Media Affects Belief Formation and Price Discovery

Authors: Yongxin Xu, Yuhao Xuan, Dongyan Ye, Gaoping Zheng

Abstract

Using account-level social and trading data, we document that after observing peers win randomized IPO allotments, connected investors shift their purchases toward lottery-like stocks. This finding reveals a cross-domain social transmission mechanism that stimulates the formation of behavioral biases, where investors mistakenly extrapolate peers' IPO lottery wins to their own prospects in lottery-like stock trading through the representativeness heuristic. This effect is amplified when IPO wins are more salient and when affected investors trade more frequently or have recently experienced losses. Alternative mechanisms, including hot hand fallacy, social persuasion, and catching up with the Joneses, do not explain our results.

Keywords

Cross-domain social transmissionRepresentativeness heuristicBehavioral biasesLottery-like stocksIPO allotmentSocial finance

Tags of Social Finance

#Evolutionary Finance#Social Transmission Biases#Social Network Structure#Archival Empirical#Financing- and Investment Decisions (Individual)#Propagation of Noise & Undesirable Outcomes