Attention Allocation of Investors on Social Media: The Role of Prospect Theory

Abstract

This study examines the attention allocation of investors on social media. Specifically, we consider the role of cumulative prospect theory (CPT). Using data from the largest finance-related subreddits on Reddit, we investigate whether CPT values based on historical returns can explain which stocks are discussed, and which stocks are ignored. Our results indicate that the behavior of millions of redditors is consistent with CPT, with stocks having extreme CPT values being significantly more likely to be discussed. Furthermore, we find that stocks with high momentum and extreme price-to-book values are more attractive to social media investors.