noise trader
{{Short description|Stock trader who uses economic noise}}
A noise trader is a stock trader whose decisions to buy or sell are based on "factors they believe to be helpful but in reality will give them no better returns than random choices".{{Cite news|title=Noise Trader Definition|language=en|work=Investopedia|url=https://www.investopedia.com/terms/n/noisetrader.asp|access-date=2021-03-07|archive-date=2021-02-19|archive-url=https://web.archive.org/web/20210219204322/https://www.investopedia.com/terms/n/noisetrader.asp|url-status=live}} These factors may include hype or rumor, which noise traders believe to be reliable signals of future returns, but which are actually forms of economic noise that cannot be used to accurately predict the future value of a stock.
Noise traders do not trade randomly; their decisions are systematic. However, their trading decisions are not based on professional advice or a business's fundamentals,{{Cite web|title=Noise Trader - Definition, Current Numbers, Impact|url=https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/noise-trader/|access-date=2021-03-08|website=Corporate Finance Institute|language=en-US|archive-date=2021-03-03|archive-url=https://web.archive.org/web/20210303121413/https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/noise-trader/|url-status=live}} and the purported signals used by noise traders are more unreliable than those used by technical analysts{{Citation needed|reason=Link does not support claim that technical analysts use more reliable signals than noise traders|date=June 2021}}. Therefore, returns on their trading decisions are expected to be no better than random choices.
Noise traders often act irrationally: they tend to be emotion-driven, impulsive, reactive, and herd-like.{{Cite web|last=Downey|first=Lucas|title=Noise Trader Risk Definition|url=https://www.investopedia.com/terms/n/noisetraderrisk.asp|access-date=2021-03-08|website=Investopedia|language=en|archive-date=2021-01-23|archive-url=https://web.archive.org/web/20210123090441/https://www.investopedia.com/terms/n/noisetraderrisk.asp|url-status=live}} The presence of noise traders in financial markets can cause prices and risk levels to diverge from expected levels even if all other traders are rational.{{cite journal|last=DeLong|first=Bradford J.|author2=Shleifer, Andrei |author3=Summers, Larry |author4= Waldmann, Robert J. |year=1990|title=Noise Trader Risk in Financial Markets|journal=The Journal of Political Economy|volume=98|issue=4|pages=703–738|jstor=2937765|doi=10.1086/261703|s2cid=12112860}}