Resolving a Paradox: Retail Trades Positively Predict Returns but are Not Profitable

In the US, retail order imbalance positively correlates with returns in the days following trades, however, in aggregate, retail investors lose money by trading. These two facts coexist because order imbalance tests ignore losses on the day of trade and because retail purchases are concentrated in stocks that earn large negative abnormal returns. Additionally, small retail trades, which are favored by retail investors with less knowledge, experience, and wealth, underperform large trades. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns.