Consistent with attention-induced trading models’ predictions, researchers (from UC Davis, Washington University in St. Louis, University of California at Berkeley and UC Irvine), link episodes of intense buying by retail investors at the brokerage Robinhood to future negative returns. Average five-day abnormal returns are -3% (-6%) for the top stocks purchased each day (more extreme herding) by Robinhood users. They find that herding episodes are related to the simplified display of information on the Robinhood app and to established proxies for investor attention. These factors lead to more concentrated trading by Robinhood users that can impact pricing. For example, during Robinhood outages, retail investor volume drops significantly among stocks that are likely to capture investor attention.
The stated mission of the Robinhood brokerage is to “democratize finance for all…[and] make investing friendly, approachable, and understandable.” Robinhood facilitates “friendly, approachable, and understandable” investing by offering a simple downloadable app that makes trading incredibly easy. The app displays only a small fraction of the stock level indicators that other brokerage platforms provide.
Instead, the app highlights easily understood lists of stocks such as the “Top Mover” list of stocks with the largest price moves on the current day. Researchers argue that the combination of simplified information display and inexperience exacerbates attention-driven buying by Robinhood users.
Heightened attention-driven buying leads to more concentrated trading by Robinhood users than other retail investors and contributes to buy-side herding events that are usually followed by negative returns. For example, the top 0.5% of stocks bought by Robinhood users each day experience negative average returns of approximately 5% over the next month. More extreme herding events are followed by negative average returns of approximately 9%.
Robinhood has been successful in its stated mission in as much as it has attracted 13 million users (as of 2020). Half of these are first-time investors who are likely in the long run to benefit from participating in markets. Robinhood attracts investors by reducing frictions and promoting simplicity. While a lack of frictions encourages market participation, it also makes speculative trading easy, which can lead to lower investment returns. Even in an industry that uses complexity to obscure risks and costs, simplicity is not problem-free.
The researchers show that simply focusing the attention of many investors on a small number of stocks can promote herding behavior that affects market returns and redounds to the investors’ detriment. Thus, while it is important that investors have access to transparent, pertinent information, disclosure alone is not sufficient to assure good investor outcomes; how information is displayed influences decisions in ways that can both help and hurt investors.