01 February 2021

Musings on Markets: “The Storming of the Bastille: The Reddit Crowd targets the Hedge Funds!”

To put the GameStop trading frenzy in perspective, let’s start with the recognition that markets are not magical mechanisms, but represent aggregations of human beings making investment judgments, some buying and some selling, for a variety of reasons, ranging from the absurd to the profound. It should therefore not come as a surprise that the forces playing out in other aspects of human behavior find their way into markets. In particular, there are three broad trends from the last decade at play here:

  1. A loss of faith in experts (economic, scientific, financial, government) […]
  2. An unquestioning worship of crowd wisdom, combined with an empowering of crowds […]
  3. A conversion of disagreements in every arena into the personal and the political […]

As I look at the GameStop episode play out, I see all three of these at play. One reason that the Redditors targeted GameStop is because they viewed hedge funds as part of the “expert” class, and consequently incapable of getting things right. They have used social media platforms to gather and reinforce each others’ views, right or wrong, and then act in concert quickly and with extraordinary efficiency, to move stock prices. Finally, even a casual perusal of the comments on the Reddit thread exposes how much of this is personal, with far more comments about how this would teach hedge funds and Wall Street a lesson than there were about GameStop the company.

Aswath Damodaran

As expected, Prof. Damodaran presents a detailed and thoughtful analysis of the Reddit-GameStop explosive situation, concluding with reasonable advice for the people involved – advice that will likely be missed or ignored, as he himself acknowledges. I get the sense that this phenomenon is a perfect storm of lockdown frustration, economic and social marginalization, and generalized loss of trust in experts and regulations. The storm rages on for now…

GameStop Operations
GameStop: Operating History

If you are in this game, at least be clear with yourself on what your end game is and protect yourself, because no one else will. The crowds that stormed the Bastille for the French Revolution burned the prison and killed the governor, but once done, they turned on each other. Watch your enemies (and I know that you include regulators and trading platforms in here), but watch your friends even more closely!

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