Wall Street investors and hedge fund managers have been stunned by the recent activity of what used to be a rather uninteresting stock – GameStop (GME). Fundamental analysis of the company has shown that GameStop’s brick and mortar business plan is increasingly becoming outdated, and year over year they continued to lose money. The forecasts for GameStop was grim, and many Wall Street investors were betting the company would ultimately fail.
What Wall Street didn’t account for was the rabid group of GameStop fan boys from a subreddit called WallStreetBets (WSB). This group of users nealry single-handedly caused a “short squeeze” of GameStop stock causing the price of GameStop stock to rocket from about $20 a share to over a $100. Or as the folks from WSB would say “GME to the moon!”
Some analysts like Jim Cramer from Mad Money believe that the investments in GameStop made by this subreddit group was a strategic way to take advantage of the over-shorted position of the stock. However, the positive sentiment surrounding GameStop on this subreddit is nothing new. GameStop has been a favorite of the subreddit group for nearly a year. Why? Cause YOLO.
Behavioral economists like Kahneman, Thaler, and Sunstein have published decades of research demonstrating how people violate axioms of rationality. People do not always behave rationally, and we shouldn’t expect the market to always behave rationally either. How much do fundamentals matter if masses of people just feel favorable to the company? This may become increasingly true as a new wave of individuals investors, not formally educated in finance, take advantage of commission-free trading platforms. Going forward I predict that public sentiment will play an increasingly large role in stock pricing- and I for one can’t wait to watch Wall Street's reaction.