Earlier this year, Reddit users in the ‘WallStreetBets’ community engineered a short squeeze on GameStop stocks. Their actions inflated the stock’s price to the extent that several major hedge funds – who were betting against it – almost went insolvent.
A new study sheds light on this extreme behaviour, finding young adults indulge in riskier financial activities when they’re being observed. It was risky for the Redditors, who were mostly younger men, to bet on a low-rated stock.
“Perhaps they were motivated to take greater risks in each other’s (online) company,” said study lead author Professor Agnieszka Tymula from the University of Sydney School of Economics.
The study allowed individuals in two age groups – 12 to 17-year-olds and 18 to 24-year-olds – to choose a fixed amount of money received with certainty or a risky lottery, which could result in a higher or lower payoff with known chances, either in private or in the presence of an adolescent observer. The researchers found that, when being observed, the 18 to 24-year-olds tended to choose the riskier, lottery option.
We know that young adults generally have a greater appetite for riskProfessor Tymula
Professor Tymula, an expert in teens and risk research, said: “We know that young adults generally have a greater appetite for risk. Our study lends further credence to the notion that this appetite grows when in the company of peers.”
“Risky behaviour can have severe consequences. Higher rates of dangerous driving leading to car accidents and higher rates of sexually transmitted infections are just two examples of this. Knowing what exacerbates young adults’ risk-taking behaviour can help inform public policies that address its consequences.”
Young teens unfazed by observers
By contrast, 12 to17-year-olds’ risk appetites were not affected by peer observation in the study. “We cannot definitively conclude whether it is chronological age, graduating from high school to university, the recruitment method, or something else not captured by our study that accounts for the difference between older and younger adolescents,” study co-author, PhD candidate Ms Xueting Wang, said.
Published in the Journal of Economic Behavior & Organization, the study also found that, when being observed, the young adults (18 to 24-year-olds) tended to perceive losses more acutely than gains – a phenomenon known as ‘loss aversion’.
Ms Xueting Wang said: “This is good news for policy, since it suggests that appealing to loss aversion should be especially effective at reducing young adults’ harmful behaviours, committed in the presence of peers. Yet this study remains preliminary: its findings need to be replicated on a broader scale before they can be applied to the population.”
