How herd behaviour drives action on r/WallStreetBets (2024)

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From the US Capitol to Wall Street, the power of social media to mobilise crowds is evident everywhere. It has introduced a new risk to the effective functioning of markets as it has to politics, exposing the limitations of politicians and regulators to manage viral campaigns.

The recent price explosion in the stumbling GameStop was portrayed on the r/WallSteetBets sub-forum on the Reddit platform as a just redistribution that took gains from the pockets of “parasitic” hedge funds that had bet against the struggling US video games retailer into the hands of “ordinary” people.

But the GameStop surge also shows the extent to which financial markets are susceptible to the mobilisation of investment crowds on social media. Investors and policymakers urgently need to understand the implications.

Investor mania is an established topic in economics, but research by Valentina Semenova and Julian Winkler at Oxford university reveals how interest in a stock can form on social media. Through hype and contagion, it then can underpin the retail investor bull runs we observed in GameStop and elsewhere.

We have tracked r/WallStreetBets’ rise from 2015. During last March’s stock market crash, users ardently advertised their purchasing of put options on the popular S&P 500 index — bets on a large stock market downturn.

Social contagion is a well-documented phenomenon: people adopt others’ behaviour, from smoking to product purchases

At the time, their size, relative to the S&P 500, meant any influence was small, and r/WallStreetBets was largely dismissed as a curiosity. However, as the forum exploded in size (it currently boasts 8.8m self-described “degenerates”), its influence has grown more pronounced.

Social contagion is a well-documented phenomenon: people adopt others’ behaviour, from smoking to product purchases. r/WallStreetBets was able to channel this into financial decision-making, attracting those with a particular taste for high-risk bets on stock-specific options that are often at odds with rational economic theory.

Users are encouraged to gamble, with redditors displaying their oft collapsing but occasionally ballooning trading losses and profits, galvanising their peers to adopt similar positions.

The likelihood of persuasion increases as an individual is exposed to more and more discussions on a given asset. It takes a while for interest in a given stock to take off, but once it does, it becomes a self-perpetuating force to be reckoned with.

Our text-based sentiment measures strongly suggest that r/WallStreetBets frequenters strive to adopt the directional positions of their peers.

In other words, they buy (or sell) a stock, not because of any fundamental pattern or news, but because other users also buy (or sell) the stock. This effect is especially large in bouts of selling, pointing to interesting psychological models of investor panic during a downturn.

Over 9,000 different stocks are discussed on the forum, but given these dynamics, only a handful, such as Tesla and GameStop, rise to prominence with potential to have an impact on the market.

Given this herd behaviour, it was just a matter of time for a situation like the GameStop frenzy to unfold. And given the dynamics of the social media investor platforms it is likely to happen again.

How to address this is now an urgent challenge for regulators. The champions of free markets, and the users, argue that the platforms allow the markets to work as intended and that hedge funds were caught making bad bets, which they otherwise would have got away with. Silencing the forum for the sake of market stability would be a draconian solution, and unlikely to endure. Anonymity on Reddit makes it harder to pursue market manipulation charges against individuals.

Few in the Biden administration would wish to use political capital defending Wall Street against a Redditor army. However, doing nothing is likely to create unacceptable risks which could threaten financial markets.

Fortunately, social contagion takes time to develop and is possible to track. This means the regulators need not be caught out. Trading limits should be tightened on stocks which display frenzied activity, preventing destabilising market moves. Margin requirements should be increased for stocks that are subject to retail investor herding.

Regulators need to act now to ensure that financial markets are properly capitalised and that this new market development does not provide a new source of systemic risk.

Video: How the GameStop short-sellers play | Charts that Count

This article draws on work by Valentina Semenova and Julian Winkler

How herd behaviour drives action on r/WallStreetBets (2024)

FAQs

What happened with WallStreetBets and GameStop? ›

On January 22, 2021, users of r/wallstreetbets initiated a short squeeze on GameStop, pushing their stock prices up significantly.

How does herd behavior affect the stock market? ›

Herd instinct, also known as herding, has a history of starting large, unfounded market rallies and sell-offs that are often based on a lack of fundamental support to justify either. Herd instinct is a significant driver of asset bubbles (and market crashes) in financial markets.

Why did GME explode? ›

A key driver in GameStop's explosion in 2021 was the buzz online, and since 2021 there have been online communities of retail investors solely dedicated to talking about GameStop. Subreddits like r/GME and r/SuperStonk have 398,000 and 950,000 members, respectively, and rank in the 1% of most subscribed to subreddits.

What happened to GameStop reddit? ›

Users there saw GameStop's stock price receding due in part to the pandemic, and approximately 140% of the public stock was sold short, meaning some who had borrowed the stock had re-lent it. Redditors decided the stock of the company—a brick-and-mortar video game sales company—was undervalued and began buying it up.

Why was WallStreetBets banned? ›

Reddit informed Rogozinski that his account was suspended for violating company policy by "attempting to monetize a community," the lawsuit noted. The lawsuit alleges that "people use Reddit to market and sell everything from investment advice to bodily fluids."

Is herd behavior good or bad? ›

Herd behavior can be good if it is temporary and has a purpose, such as keeping you from harm. However, it can also be bad, especially when it replaces critical thinking skills and conscience. It's important to be aware of not only the choices you make but why you are making those choices.

What is herd behavior commonlit answers? ›

"Herd behavior" is a term used to describe the tendency of individuals to think and act as a group. As you read, take notes on how herd behavior affects the actions of humans. Herd of Goats by Unknown is in the public domain.

What are examples of herd Behaviour? ›

Herd behavior occurs in animals in herds, packs, bird flocks, fish schools and so on, as well as in humans. Voting, demonstrations, riots, general strikes, sporting events, religious gatherings, everyday decision-making, judgement and opinion-forming, are all forms of human-based herd behavior.

Who holds the most GME stock? ›

What percentage of GameStop (GME) stock is held by retail investors? According to the latest TipRanks data, approximately 66.76% of GameStop (GME) stock is held by retail investors. Who owns the most shares of GameStop (GME)? Vanguard owns the most shares of GameStop (GME).

Who stopped GME trading? ›

As Robinhood restricted trading of GameStop shares, users alleged that Citadel Securities directed Robinhood to do so. Citadel Securities stated that they did not instruct any brokerage to suspend or otherwise limit trading, and Robinhood denied that it had been pressured by Citadel.

Will GME go back up in 2024? ›

For 2024, the stock price of GameStop (GME) is forecasted to average around $13.77. Predictions vary, with some analysts from Stock Screener, and Traders Union estimating a high of $17.59 and a low of $9.95.

Can GME still short squeeze? ›

Now, however, just 20% of all outstanding GME shares are sold short, meaning those short sellers can probably cover their shares more easily and won't be squeezed as hard as in 2021.

What does moass mean? ›

MOASS, meaning the Mother of All Short Squeezes, as noted, is a trading strategy in which a high volume of buyers drive up shares of stocks that were being “shorted” by other investors.

How did hedge funds lose money on GameStop? ›

The normie GameStop investors who recognized the opportunity for a short squeeze were right — the stock was over-shorted, they saw their chance, and they seized it. The episode took out Melvin Capital — even after getting extra money injected, the hedge fund eventually went under.

What happened with the GameStop scandal? ›

In January 2021, a short squeeze of the stock of the American video game retailer GameStop and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers.

Why did hedge funds lose on GameStop? ›

The normie GameStop investors who recognized the opportunity for a short squeeze were right — the stock was over-shorted, they saw their chance, and they seized it. The episode took out Melvin Capital — even after getting extra money injected, the hedge fund eventually went under.

Is the GameStop guy still rich? ›

While most assume he does, it is hard to say for sure, as he no longer posts video updates with screenshots of his portfolio holdings. As of 2023, several different sources reported Gill's estimated net worth to be around $30 million.

Why did GameStop stocks shoot up? ›

Traders on the subreddit wallstreetbets coordinated the 2021 short squeeze by encouraging each other to buy shares and call options, which are contracts that allow you to buy shares for a certain price by a certain date. In late January 2021, GameStop stock rose nearly 135% in its biggest one-day surge.

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