Noise trader

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A noise trader also known informally as idiot trader[1] is described in the literature of financial research as a stock trader whose decisions to buy, sell, or hold are irrational and erratic. The presence of noise traders in financial markets can then cause prices and risk levels to diverge from expected levels even if all other traders are rational.[2]

In finance, noise obtained a formal definition in a 1986 paper by Fischer Black: "Noise in the sense of a large number of small events is often a cause factor much more powerful than a small number of large events can be."[3]

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  1. ^ Krugman, Paul (2009-09-06). "How Did Economists Get It So Wrong?". The New York Times. Retrieved 2010-05-20. 
  2. ^ DeLong, Bradford J.; Shleifer, Andrei; Summers, Larry; Waldmann, Robert J. (1990). "Noise Trader Risk in Financial Markets". The Journal of Political Economy (The University of Chicago Press) 98 (4): 703–738. doi:10.1086/261703. JSTOR 2937765. 
  3. ^ Black, Fischer (1985-12-20). "Noise". Journal of Finance 41 (3): 529–543. doi:10.2307/2328481. JSTOR 2328481.