Irrational Attention, Retail Investor Herding, and Return Co-movement

Abstract

Through a textual analysis of Reddit’s WallStreetBets discussions, we find that increased irrational attention—measured by meme stock ticker mentions—is associated with a nonlinear decline in return dispersions, indicating heightened herding behavior, particularly during market upswings. Additionally, greater irrational attention corresponds to higher return co-movement, with pairwise correlations rising significantly among meme stocks that receive more attention. However, unlike rational inattention, irrational attention does not lead to greater co-movement with market returns. Our findings highlight the risks of social media-driven investment strategies for retail investors, as excessive herding increases their portfolio volatility.

Keywords: Irrational Attention; Herd Behavior; Correlation; Diversification, Social Media; Meme Stocks.

JEL Classification: G14; G12