Meeting Demands of a Burgeoning Field

Taking stock of the GameStop saga

Headshot of Roman Sheremeta
Roman Sheremeta

In late January, heavy trading sent GameStop’s stock rocketing to $347.51 a share, a 1,800% increase from the gaming retailer’s price just three weeks earlier. In an age of digital downloads, the brick-and-mortar chain’s financial outlook didn’t support the dramatic spike. That made it the kind of event that behavioral economist Roman Sheremeta, PhD, loves to analyze. What the associate professor at Case Western Reserve’s Weatherhead School of Management found most intriguing: Amateur investors determined to take on Wall Street not only pushed the stock price to a peak, but hung on as the share price inevitably dropped. For them, Sheremeta said, the campaign’s “collective interest to hold the stock outweighed the individual interest to sell.”

What Happened:

Big hedge funds had bet that GameStop’s prices would fall and started short selling its stocks, which involves borrowing stock, selling it on the market and then buying it back at a lower price. When an informal group of individual traders realized the scope of the hedge funds’ plans, Sheremeta said they bought the stock en masse to drive up the prices and bust the funds’ bets in a process known as a “short squeeze,” which caused GameStop short sellers to lose a reported $13 billion.

Why It Happened:

Timing was one factor: “Savings rates during the pandemic were some of the highest in U.S. history,” said Sheremeta, a result of federal stimulus checks and limited leisure spending. Second, apps such as Robinhood have increasingly democratized access to trading markets. And third, social media—particularly Reddit’s online forum “Wall Street Bets”—provided unprecedented rallying power and helped incubate the community that made the campaign possible. “It was 10 million people with their own language,” he said. “When you have this kind of community, you have...a higher rate of collaboration.”

What's Next:

New regulations could be looming, Sheremeta said, with the U.S. Securities and Exchange Commission likely to rein in the ability of individuals to artificially pump up stock prices on social media. But he thinks this episode also could spur more amateur investors to take classes on complex financial instruments as they increasingly try to level the playing field with Wall Street.

— Dan Morrell