Andrea Yi

Date of Award

Spring 2023

Degree Name

Bachelor of Science (BS)

Advisor(s)

Lin Tong

Abstract

With the popularization of objectively risky investments like meme stocks and crypto pump-and-dump schemes, it’s important to explore the underlying motivations of why investors participate in these investments. Previous research has shown that individualistic characteristics like overconfidence and gambling preferences move investors to participate in pump-and-dump schemes (Dhawan & Putnins, 2021), but is there a more macro factor that can determine this likelihood? This thesis examines the relationship between investor sentiment and the frequency of crypto pump-and-dump schemes using regression analysis controlling for factors like SP500 price, crypto popularity, and changes in regulation. The findings suggest that higher investor sentiment increases the number of crypto pump-and-dumps the following month. These results have important implications for potentially predicting the likelihood of a pump-and-dump scheme and aiding regulators with this foresight. The study concludes that high investor sentiment can lead to overconfidence, which in turn can have negative consequences on investment decision-making (like participation in a pump-and-dump scheme). Overall, this research contributes to the study of how investor sentiment can lead to irrational investor behavior.

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