Democratization of Retail Trading: Can Reddit's WallStreetBets Outperform Investment Bank Analysts?

Paper: arXiv 2301.00170

Authors: Tolga Buz, Gerard de Melo

Abstract

The recent hype around Reddit’s WallStreetBets (WSB) community has inspired research on its impact on our economy and society. Still, one important question remains: Can WSB’s community of anonymous contributors actually provide valuable investment advice and possibly even outperform top financial institutions? We present a data-driven empirical study of investment recommendations of WSB in comparison to recommendations made by leading investment banks, based on more than 1.6 million WSB posts published since 2018. %enriched with stock market data. To this end, we extract and evaluate investment recommendations from WSB’s raw text for all S&P 500 stocks and compare their performance to more than 16,000 analyst recommendations from the largest investment banks. While not all WSB recommendations prove profitable, our results show that they achieve average returns that compete with the best banks and outperform them in certain cases. Furthermore, the WSB community has been better than almost all investment banks at detecting top-performing stocks. We conclude that WSB may indeed constitute a freely accessible, valuable source of investment advice.

Complexity vs Empirical Score

• Math Complexity: 2.5/10
• Empirical Rigor: 6.0/10 (capped from 7.5: transaction costs not modelled; see penalty flags)
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a strong empirical analysis comparing a large dataset of Reddit sentiment/recommendations against institutional analyst ratings. While mathematically straightforward, relying primarily on NLP extraction and portfolio return calculations, the empirical rigor and timely comparative insight make it a highly practical study.

Research Flowchart

  flowchart TD
    A[Research Question: Can WallStreetBets outperform investment bank analysts?] --> B[(Data Sources: 1.6M WSB Posts & 16K Bank Analysts Recommendations 2018-present)]
    B --> C[NLP & Text Mining: Extract Investment Recommendations for S&P 500 Stocks]
    C --> D[Empirical Evaluation: Calculate Average Returns & Benchmark Performance]
    D --> E[Key Outcomes: WSB matches top banks in average returns & excels at detecting top-performing stocks]