Taking Stock of the GameStop Saga

02/19/2021
By Ed Brennen

Because Isaiah Langa ’20 studies finance in the Manning School of Business and has been investing on his own for several years, he occasionally receives a text message from a friend or relative seeking advice on a stock pick.

When shares of video game retailer GameStop skyrocketed by more than 2,000% in January, fueled by an online Reddit community of amateur “retail” investors trading on the popular Robinhood platform, Langa’s phone lit up.    

“One day I got five texts from different people asking me about GameStop,” says Langa, a native of Dracut, Massachusetts, who is completing his Master of Science in Finance this semester after earning his bachelor’s degree in business administration last spring. “It was interesting to see how many people were involved who weren’t typically investors.”

Indeed, the meteoric rise (and subsequent fall) of GameStop and other so-called “meme” stocks such as AMC Entertainment, BlackBerry and Nokia is a business story that transcends Wall Street. It created overnight millionaires, sparked congressional hearings and movie deals, and provided financial novices with a crash course on the difference between a “short” and a “short squeeze.”

And, according to Assoc. Prof. of Finance Ravi Jain, it nearly short-circuited the investment industry.

Unprecedented Event

“I think that’s blown over now, but it makes an interesting story,” says Jain, who believes two things happened with the GameStop craze: “One that was not new and one that was very new.”

What wasn’t new, Jain says, was hedge funds betting on a company like GameStop to fail by shorting the stock — and others going against that bet with a short squeeze. 

What was unprecedented this time, Jain says, is who did the squeezing.

“It was not done by a bigger hedge fund or institution; it was done by thousands of unrelated people who organized on social media. That is a totally new concept that we had never seen before,” he says.

While the Reddit-fueled runups have subsided, Jain anticipates that regulators may respond with new measures such as limiting the percentage of a company’s stock available for short sale. 

“The finance industry has to take notice of this incident,” he says. “Market participants will keep this in mind. This will affect decision-making — that you can suddenly have thousands and thousands of people on the other side of the trade.”

Jain is less certain why thousands of amateur speculators would band together on Reddit and try to stick it to hedge funds by risking their own money on a stock like GameStop, which cratered at $2.57 last summer but reached $483 during the frenzy (it was down to $46 in mid-February).

“What were they thinking? I have no clue,” he says. “It is really beyond my understanding.”

Consensus Language

For that, he defers to Manning School colleague Ann Kronrod, an assistant professor of marketing, entrepreneurship and innovation whose research areas include social networks, linguistics and persuasion.

Given the rise of commission-free trading apps like Robinhood that are billed as a way to democratize investing, Kronrod is not surprised that millions of users have gravitated to social media platforms such as Reddit to discuss investment strategies.

“People are generally more self-reliant today, whether it’s solving health issues, cooking or exercise. You do everything online, and you look at what other people do,” she says. “So in that sense, the main driver of many decisions, including financial investment decisions, is consensus — or social validation. You see lots of people talking about something, and then you do the same because you understand that if so many people are thinking like that, then it must be true.”

According to Kronrod’s research, consensus language like “everyone is investing in GameStop” is even more powerful when it comes from someone you don’t know — like on an anonymous social media site.

“When it comes from people you would call very ‘weak ties’ as opposed to your close friends, they belong to a much larger group in your perception. When they say ‘everybody,’ it sounds like people everywhere,” says Kronrod, who published an article on weak-tie consensus language last year in the Journal of Marketing Research.

‘Just a Phase’

While trading apps like Robinhood have become increasingly popular with young people — particularly during the pandemic — Jain discourages his finance students from using them.

“Investing is a serious business where you invest to create wealth out of your savings,” he says. “These apps are closer to speculation. There are benefits of getting people involved in investing, but that is not the way to do it.”

Undergraduate and graduate students in his Student Managed Fund course, who make investments over a three-year period in competition against other UMass campuses, appear to be listening.

“When you’re investing like that, it’s a little more like gambling. I try to stay away from the pop culture, social media craze,” says Chase Blackmun, a senior business administration major and UML hockey player from Hudson, Wisconsin.

Blackmun, who is in the Honors College, prefers to invest on the Charles Schwab platform, where he’s made “maybe 10 trades in the past two years, compared to some people who make 10 a day on Robinhood.” He says he wasn’t interested in putting money into GameStop.

“I know it’s just a phase. The stock’s price wasn’t indicative of the company’s success,” he says. “I try to find value stocks and just wait many years to see how it goes. I think that’s the safest way to invest for long-term success.”

Melanie Sunnerberg, a senior business administration major and fellow Student Managed Fund member, agrees — although she does think it’s a good thing that more people have become interested in investing.

As president of the Joy Tong Women in Business student organization, Sunnerberg helped launch a Women in Finance initiative designed to encourage more women to go into the industry. She says they’ve had a lot to talk about over the past year.

“Being a finance student right now in the COVID crash, the market recovery and now the GameStop scenario, it’s been fascinating because you have so much to discuss with your peers and professors,” says Sunnerberg, a native of Burlington, Massachusetts, whose concentrations are in finance and marketing. “It’s nice to be able to understand and educate others on what’s going on.”

Langa, the graduate student who saw a spike in text messages for stock advice, says he didn’t recommend buying GameStop.

“I told people it could go up, but I didn’t think it was sustainable,” he says. “But I’m happy for all the people that made money. It’s kind of nice to see the little guy win.”

At the same time, Langa says the GameStop saga has revealed the business model of retail investment apps like Robinhood, which profits by selling trade information to hedge funds. Robinhood also received backlash after temporarily halting the purchase of GameStop stock at the height of the frenzy.

“They’re really part of the system,” says Langa, who invests with a Fidelity account. “Even though I wasn’t part of the GameStop craze, I feel like the big guy always wins eventually. You can’t beat Wall Street.”