The Impact of Robinhood's Retail Investing App on Investor Psychology and Financial Markets

Abstract

The pandemic has seen a dramatic rise in retail investing, with millions of individuals worldwide downloading trading apps such as Robinhood. Such trading apps have provided unprecedented access to commission-free investing for all, regardless of investing experience and financial literacy. This creates an ethical dilemma: while a moral society should provide universal access to opportunities for wealth accumulation, easy access to investing has the potential to do great harm to novice investors. The GameStop frenzy of 2021 is a prime example of the damaging effects of risky investing decisions, both on individual novice investors and on financial markets overall. In its November 2021 Financial Stability Report, the U.S. Federal Reserve specifically called out the dangers of social media-driven investing and speculation by retail investors, citing the hazards of market volatility for financial stability. This research will examine the history of retail investing, the societal factors and existing inequities that have led to the rise of retail investing, and the impact of retail investing on investor psychology and decision-making. The research finds that retail investing encourages herd behavior and impulsive decision-making, and leads to more attention-induced trading and negative returns. Retail investing also amplifies both positive and negative market movements. This research will then describe possible solutions to these challenges, to ensure stable and secure financial markets, wise financial decision-making on the part of individual investors, socially responsible and responsive trading apps, and ethical access to trading for all investors.