Noise trader
An investor who trades on hunches and sentiment rather than fundamental information.
What it means
A market participant whose buying and selling is driven by beliefs or emotions uncorrelated with fundamental value — noise mistaken for signal. In noise-trader models, the unpredictable shifts in their sentiment create a systematic risk that deters rational arbitrageurs, because betting against mispricing can lose money if the noise traders' mood worsens before prices correct. Their presence keeps prices noisy, sustains anomalies, and can let irrational traders survive and even earn higher returns by bearing the risk they themselves create. It matters because noise traders are the engine that turns 'limits to arbitrage' into a binding constraint on market efficiency.
Examples
Retail crowds bidding a meme stock far above any reasonable valuation, on sentiment alone, are acting as noise traders.
An investor dumps a solid fund the morning after a gloomy headline, then buys back once markets feel cheerful again — mood, not earnings, is moving the trades.
Crypto buyers piling into a token after a celebrity's offhand post are trading on chatter, not on anything that has changed about the token itself.
First described in Black (1986); De Long, Shleifer, Summers & Waldmann (1990).