Behavioral Biases and Retail Investor Decision-Making in the Era of Social Media Trading: A Qualitative Study

Abstract

The inclusion of the social media platform in the financial market has essentially transformed the behavioral pattern of retailing investment. Online community platforms like Reddit, X (once Twitter), Tik Tok, Discord and YouTube become decentralized information structures where financial stories, speculation, and sentiment are shared at an unprecedented rate. Although the previously mentioned cognitive biases have been traditionally listed in behavioral finance literature such as herd behavior, overconfidence, confirmation bias, anchoring and loss aversion, the experiential aspects of the biases and their exacerbation in digitally mediated trading settings have been relatively unstudied. In this research, the qualitative approach that will be used is interpretivism to explore how behavioral biases influence the decision-making process of retail investors in social media-based trading communities. Twenty-five retail investors who are active participants of the online trading forums were interviewed using semi-structured interviews. A thematic analysis shows that the social media settings increase classical cognitive biases in the following ways: algorithmic filtering, apparent social validation parameters, narrative framing, and emotionally charged group engagement. The results show that perceived collective intelligence enhances herd behavior; overconfidence is also socially reinforced in ways that depend on engagement mechanisms; confirmation bias is aggravated by personalization through algorithms; impulsive decision-making is fueled by the feeling of missing out; and trust is becoming disinterred and decentralized to peer networks and influencers. The contribution of the study to the literature on behavioral finance is that the psychological biases are placed in the context of digital sociotechnical systems and provides implications to monetary education, regulatory control, and platform regulation in modern markets.

Keywords: Behavioral finance; Retail investors; Social media trading; Herd behavior; Algorithmic amplification; Fear of missing out (FOMO)