Noise Trader
An investor who makes trading decisions based on sentiment, rumors, or trends rather than fundamental analysis of asset value.
What is Noise Trader?
A noise trader is a market participant whose trading decisions are driven by sentiment, recent price trends, media narratives, or incomplete information rather than rational analysis of an asset's intrinsic value. The term was formalized in the 1990 paper 'Noise Trader Risk in Financial Markets' by De Long, Shleifer, Summers, and Waldmann. Noise traders introduce mispricing into markets and contribute to short-term volatility, but they can persist because their correlated behavior creates additional risk for rational arbitrageurs who would otherwise correct the mispricings. In aggregate, noise traders can drive asset prices significantly away from fundamental value for extended periods—a phenomenon known as 'noise trader risk.' Behavioral finance identifies many patterns of noise trading, including momentum chasing, overreaction to news, and following social media trends. The retail trading frenzy in meme stocks during 2021 is a contemporary example of noise trader activity.
Example
In January 2021, retail investors on Reddit's WallStreetBets coordinated to buy GameStop (GME) stock based on social sentiment and a short-squeeze narrative rather than any improvement in GameStop's business fundamentals. GME surged from ~$20 to over $480 in days—a classic noise trader episode where sentiment-driven buying overwhelmed fundamental valuation.
Source: De Long et al. (1990) — Noise Trader Risk in Financial Markets, Journal of Political Economy