Momentum (MMT) and the Rising Popularity Among Retail Investors: Insights from Behavioral Finance

Retail Investors, Momentum, and the Influence of Behavioral Finance

In recent years, the growing enthusiasm among retail investors for Momentum (MMT) has sparked renewed discussions about how behavioral finance contributes to unusual patterns in the market. Between 2023 and 2025, the price movements of MMT have closely resembled the speculative excitement that surrounded the GameStop (GME) short squeeze in 2021. This trend has been largely fueled by online sentiment and psychological tendencies, rather than by traditional measures of a company’s value. Such developments highlight how retail participation can disrupt market efficiency, presenting both opportunities and challenges for investors and regulators.

The Psychology Behind the MMT Surge

The dramatic rise in MMT’s popularity among retail traders can be traced to a mix of cognitive biases. Overconfidence and the tendency to follow the crowd—two core concepts in behavioral finance—have created a self-reinforcing cycle, with investors pursuing momentum trades without fully evaluating the underlying fundamentals.

According to a Bitget report, the MMT phenomenon reflects a broader transformation in retail investor behavior, where emotional reactions and compelling online narratives often outweigh careful financial analysis. Academic studies have found that platforms like Reddit and Twitter can intensify investor sentiment, frequently leading to swift price changes that are disconnected from a company’s actual performance.

By 2025, retail investors were responsible for 21% of all shares traded—a level reminiscent of the pre-meme stock era. This increase is not just about more people participating; it also demonstrates how social media sentiment can anticipate short-term trading patterns and market volatility. Research has shown that the impact of Twitter sentiment on market outcomes can be both faster and more significant than that of traditional news sources (source).

Institutional Strategies Amid Retail-Driven Volatility

While individual investors are often swayed by emotion, institutional players have typically used their expertise to take advantage of these market irregularities. Studies by Wu and Xu indicate that institutional buying and selling often align with future earnings surprises and stock performance, suggesting that these investors may rely on exclusive information or contrarian tactics. During the MMT rally, institutional investors have seized on the volatility generated by retail speculation. For instance, analysis of the Kuwaiti market during the COVID-19 pandemic illustrates how contrarian approaches can benefit from pricing errors caused by retail activity.

Regulatory Challenges and Market Resilience

The rise of MMT has also attracted the attention of regulators. The SEC has stepped up its examination of how social media influences speculative trading, as these trends pose new risks to the stability of established financial systems. Behavioral finance research cautions that such anomalies can heighten market swings during periods of stress, raising important questions about whether current regulations are sufficient to manage the risks associated with algorithm-driven retail trading and the meme stock phenomenon.

Key Takeaways for Investors and Policymakers

The story of MMT offers a vivid example of how behavioral finance shapes real-world markets. Although retail investors are sometimes seen as irrational, their collective actions can create persistent market distortions that even experienced professionals find difficult to navigate. For individual investors, it is crucial to recognize the psychological factors—like overconfidence and herd mentality—that influence decision-making, in addition to analyzing financial data. Regulators, meanwhile, face the challenge of encouraging innovation in retail investing while ensuring safeguards are in place to protect market stability.

As MMT’s price continues to fluctuate between exuberance and correction, one thing is clear: the interplay between behavioral finance and retail-driven market anomalies will remain a central theme in the evolution of modern investing.