Economists And Psychologists Are Weaponizing Psychology And The Idea Of "Rationality"

This year has been interesting for Wall Street, to say the least. After hearing that hedge funds had shorted the stock of the dying retail chain GameStop (GME) by over 100 percent of shares, Redditors banded together to buy up the stock, knowing that short sales do not expire, so the hedge funds will eventually be forced to buy it all back at a drastically raised price.

Estimates of short interest on the stock from sources such as the NASDAQ, MarketBeat, Yahoo Finance, and Bloomberg range from 53 percent to 177 percent of float. Hedge funds have been shutting down retail brokers, trading among themselves after hours, and publicly claiming to cover shares they had not yet bought, all in an attempt to lower the price on the stock, minimizing losses for the hedges when they finally cover the shorts. Historical examples such as the Volkswagen short squeeze of 2008 suggest that even a short interest as low as 50 percent could still yield high dividends for GME stockholders.

psychology

With this in mind, Redditors hold GameStop under the perfectly rational desire to avoid getting tricked out of their money, and many more profess a willingness to hold despite losses if it means that hedge funds will be punished through bankruptcy for manipulating the market.

So why does the corporate press describe this phenomenon as a “bubble” that is “irrational, insane, and dangerous,” the product of the “hysteria” and “cognitive bias” of investors who “don’t know what they’re doing”? Short squeezes are not new. The Redditors’ strategies are nothing that Wall Street has not tried before. In addition, the Redditors who initially popularized the stock have a reputation for treating the stock market like a casino, as evidenced by the name of their community, r/wallstreetbets. Gambling is a form of consumption spending, an end in itself. It is not inherently irrational for someone to buy a consumer good, no matter how strange.

Moreover, the Redditors live in a world where the committee investigating the blatant fraud surrounding GameStop is led by a woman who accepted six-figure fees from the defendant. Holding the stock as an attempt at getting justice makes sense, especially from the perspective of an online community full of Millennials, who have had their economic future crippled by Wall Street financiers through three consecutive “once in a generation” market crashes. For the amateur investor, there is no rule of law on Wall Street—and revenge is a rational strategy outside the law. All of this is obvious to anyone who reads what the Redditors have to say. Their plan might be ill advised, but it is definitely not irrational. Why doesn’t the corporate media acknowledge this?

The answer is that economic rationality, like so many other terms, has been defined to suit the convenience of the neoliberal establishment. The concept of bias in economic decision-making is pseudoscientific, since its meaning can be warped to include any deviation from neoclassical economic models, even ones which are rational when put in context. In the instance of the GameStop investors, this confusion of terms is serving its purpose, pathologizing as irrational a well-reasoned populist response to a broken financial system. This crucial context is necessary to recognize that the media’s concern for the mental soundness of retail investors is only a tool meant to delegitimize them in the eyes of the public.

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Grace Ann Converse is a junior studying economics and applied mathematics at Oklahoma State University, as well as a graduate of Mises University 2019 and 2020.

Mises Institute is a tax-exempt ...

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