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Senior Capstone 2021

Rolling the Dice: Speculation, Debt, Psychology and Reddit

Abstract: While there have been many examples of speculation throughout history, the advent of social media has laid the way for a novel type of retail speculation within the financial markets. This paper will be exploring the relationship between the subreddit r/wallstreetbets, the popular brokerage service RobhinHood and speculation. We will investigate the psychological mechanisms that underlie the r/wallstreetbets investing community, the investment strategies they utilize, and their impact on the broader financial system. We find members of the subreddit routinely engage in high-risk investment strategies akin to gambling, due in part to a combination of psychological pressure exerted through r/wallstreetbets, and because of the business practices of brokers like RobinHood. To assist in this research, we will perform a regression to determine the correlation between the daily popularity of three tickers on r/wallstreetbets: AMC, AMD and GME, and the daily idiosyncratic risk undertaken by investors of the given security, for the period between 5/8/2020 and 12/30/2020. Our results find that our regression models can account for 26%, 6% and 49% of variance in idiosyncratic risk, respectively. Finally, we will discuss shortcomings within the regulatory framework, and suggest future changes to regulation including increased regulatory broker oversight and an extension of PDT laws.

Maximillian Paul is a fourth-year finance and economics student at Northeastern University. Max has a keen interest in the mechanisms underlying our financial markets and wants to pursue a career in finance.