From Reddit to Robinhood, Manning Faculty and Students Share Lessons Learned
Image by Ed Brennen
Shares of video game retailer GameStop soared by more than 2,000% in January as amateur investors organized a short squeeze of hedge funds on the social media platform Reddit.
02/19/2021
By Ed Brennen
When shares of video game retailer GameStop skyrocketed by more than 2,000% in January, fueled by an online Reddit community of amateur 鈥渞etail鈥� investors trading on the popular Robinhood platform, Langa鈥檚 phone lit up.听听听听
鈥淥ne day I got five texts from different people asking me about GameStop,鈥� says Langa, a native of Dracut, Massachusetts, who is completing his听Master of Science in Finance听this semester after earning his bachelor鈥檚 degree in business administration last spring. 鈥淚t was interesting to see how many people were involved who weren鈥檛 typically investors.鈥�
Indeed, the meteoric rise (and subsequent fall) of GameStop and other so-called 鈥渕eme鈥� 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 鈥渟hort鈥� and a 鈥渟hort squeeze.鈥�
And, according to Assoc. Prof. of Finance听Ravi Jain, it nearly short-circuited the investment industry.
Unprecedented Event
鈥淚 think that鈥檚 blown over now, but it makes an interesting story,鈥� says Jain, who believes two things happened with the GameStop craze: 鈥淥ne that was not new and one that was very new.鈥�
What wasn鈥檛 new, Jain says, was hedge funds betting on a company like GameStop to fail by shorting the stock 鈥� and others going against that bet with a short squeeze.听
Assoc. Prof. of Finance Ravi Jain says the GameStop episode will likely affect the decision-making of market participants who take a short position on a company.
What was unprecedented this time, Jain says, is who did the squeezing.
鈥淚t 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,鈥� 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鈥檚 stock available for short sale.听
鈥淭he finance industry has to take notice of this incident,鈥� he says. 鈥淢arket participants will keep this in mind. This will affect decision-making 鈥� that you can suddenly have thousands and thousands of people on the other side of the trade.鈥�
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).
鈥淲hat were they thinking? I have no clue,鈥� he says. 鈥淚t is really beyond my understanding.鈥�
Consensus Language
For that, he defers to Manning School colleague听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.
Image by Ed Brennen
Asst. Prof. of Marketing, Entrepreneurship and Innovation Ann Kronrod says consensus langue on social media platforms like Reddit can influence investment decisions.
鈥淧eople are generally more self-reliant today, whether it鈥檚 solving health issues, cooking or exercise. You do everything online, and you look at what other people do,鈥� she says. 鈥淪o in that sense, the main driver of many decisions, including financial investment decisions, is consensus 鈥� 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.鈥�
According to Kronrod鈥檚 research, consensus language like 鈥渆veryone is investing in GameStop鈥� is even more powerful when it comes from someone you don鈥檛 know 鈥� like on an anonymous social media site.
鈥淲hen it comes from people you would call very 鈥榳eak ties鈥� as opposed to your close friends, they belong to a much larger group in your perception. When they say 鈥榚verybody,鈥� it sounds like people everywhere,鈥� says Kronrod, who published an article on weak-tie consensus language last year in the Journal of Marketing Research.
鈥楯ust a Phase鈥�
While trading apps like Robinhood have become increasingly popular with young people 鈥� particularly during the pandemic 鈥� Jain discourages his finance students from using them.
鈥淚nvesting is a serious business where you invest to create wealth out of your savings,鈥� he says. 鈥淭hese apps are closer to speculation. There are benefits of getting people involved in investing, but that is not the way to do it.鈥�
Undergraduate and graduate students in his听Student Managed Fund听course, who make investments over a three-year period in competition against other UMass campuses, appear to be listening.
鈥淲hen you鈥檙e investing like that, it鈥檚 a little more like gambling. I try to stay away from the pop culture, social media craze,鈥� says听, a senior business administration major and UML hockey player from Hudson, Wisconsin.
Blackmun, who is in the听Honors College, prefers to invest on the Charles Schwab platform, where he鈥檚 made 鈥渕aybe 10 trades in the past two years, compared to some people who make 10 a day on Robinhood.鈥� He says he wasn鈥檛 interested in putting money into GameStop.
鈥淚 know it鈥檚 just a phase. The stock鈥檚 price wasn鈥檛 indicative of the company鈥檚 success,鈥� he says. 鈥淚 try to find value stocks and just wait many years to see how it goes. I think that鈥檚 the safest way to invest for long-term success.鈥�
Melanie Sunnerberg, a senior business administration major and fellow Student Managed Fund member, agrees 鈥� although she does think it鈥檚 a good thing that more people have become interested in investing.
As president of the student organization, Sunnerberg helped launch a Women in Finance initiative designed to encourage more women to go into the industry. She says they鈥檝e had a lot to talk about over the past year.
鈥淏eing a finance student right now in the COVID crash, the market recovery and now the GameStop scenario, it鈥檚 been fascinating because you have so much to discuss with your peers and professors,鈥� says Sunnerberg, a native of Burlington, Massachusetts, whose concentrations are in finance and marketing. 鈥淚t鈥檚 nice to be able to understand and educate others on what鈥檚 going on.鈥�
Langa, the graduate student who saw a spike in text messages for stock advice, says he didn鈥檛 recommend buying GameStop.
鈥淚 told people it could go up, but I didn鈥檛 think it was sustainable,鈥� he says. 鈥淏ut I鈥檓 happy for all the people that made money. It鈥檚 kind of nice to see the little guy win.鈥�
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.
鈥淭hey鈥檙e really part of the system,鈥� says Langa, who invests with a Fidelity account. 鈥淓ven though I wasn鈥檛 part of the GameStop craze, I feel like the big guy always wins eventually. You can鈥檛 beat Wall Street.鈥�