Information Cascades and GameStop
In the beginning of 2021, there was a sudden frenzy of people buying GameStop shares, throwing the stock market in a state of confusion. The Reddit community r/WallStreetBets was primarily responsible for this ‘short squeeze’ and caused rapidly increasing prices in the GameStop stock, going from $20 on January 12 to $347 on January 27. (1, 2) There have been additional instances of this ‘meme stock’ phenomenon in AMC, BlackBerry, and more, where the driving force of these investors were to make “a statement against the world, governments, and large Wall Street financial institutions.”(1) In a blog post published in the Columbia Law School Blue Sky Blog, John P. Anderson categorizes individuals like those from r/WallStreetBets as “expressive traders” and describes how social media has allowed “a large number of small investors to coordinate their trading in real time to deliver their desired message in the form of a measurable impact on the targeted stock’s price.” (3)
The GameStop phenomenon is an example of how people follow the crowd and the widespread impact of information cascades on the stock market. This information cascade occurred in a short period of time and involved a lot of people. Since the stock market is updated regularly and changes based on the behavior of investors, the GameStop scenario would be considered an information cascade rather than an example of a wisdoms-of-the-crowds event since people are able to see other people’s decision to buy GameStop shares. People in the Reddit community were connected in a large network of young amateur investors who did not necessarily consider the traditional trading strategies and analysis that normally inform investors of what to buy. The reason why the GameStop stock rose so much was likely due to how people were following the crowd, in which members of the community saw that everyone else was buying GameStop shares which motivated them to also invest in GameStop.
Sources:
- https://www.valueofstocks.com/2021/10/06/what-is-a-meme-stock-the-meaning-behind-gamestop-saga/
- https://www.investopedia.com/terms/s/shortsqueeze.asp
- https://clsbluesky.law.columbia.edu/2021/03/24/gamestop-social-media-and-the-phenomenon-of-expressive-trading/