In early 2021, retail investors embarked on a mission to save a stock called Gamestop ($GME). Hedge funds were taken by surprise and after a week of various “market attacks”, they lost an estimated $12.5 Billion to retail investors who were tired of financial cronyism. Read this article for a more full explanation.
Participating in a market is akin to a continuous election. I used our idea of a rational voting utility formula to analyze this event. Our expression for participation and rationality is thus:
p[B] - C + D > 0
The cost of participating was purchasing the stock GME (or any memstock). Around $200-300 depending on buy-in time. Moreover, D (intangible fervor) was significantly high for many people, who saw an opportunity to strike back at institutions that had wronged them. Many posters “delivered” dramatic speeches, about getting revenge from their parents suffering during the ‘08 crash caused by the same crony establishment. The probability of benefit was also most interesting. It was a gamble on whether the stock would end up higher or lower than originally purchased. Yet, the probability was significantly higher than a normal election where you’d either win or lose. You could either gain big but even if you lost, you could still have partial recuperation. The potential benefit was also high. There were believable claims of a gamma squeeze occurring amid the 141.8% float of the stock. This would’ve meant possible financial benefits over $5,000.
Therefore, it was rational for people to have participated in the 2021 GME Stock Revolt if expected benefits and intangible satisfaction at striking crony institutions were not offset by the costs of participating. Sample equation: .75[$375] - $200 + $500 > 0. Therefore, like gambling or voting it was rational for many to participate in the GME and AMC markets.
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