I think the last week on financial twitter has been very educational, as the GameStop saga has grown in popularity from the occasional Tweet to seemingly being the only thing that people are tweeting about. This, I think, makes for a great case-study of how bubbles are formed, and how they rise (and eventually fall). Understanding how the GameStop story (a bubble in fast-forward) was born and unfurled, can help us to better understand those bubbles that take a bit longer to fully play out.

First, I however need to be up-front about not having followed the GameStop story at much depth, at first: Because there are so many things vying for your attention every day (and because you rarely know what’s worth paying attention to until after the fact), I’m not sure exactly how the GameStop story started, and it’s probably not even important: Every bubble is different, and instead it’s what they have in common that is most useful to think about. 

The boilerplate version of the story however goes something as follows, where GameStop (as an Old Economy company) has been disrupted by gamers’ move to streaming. This left the company struggling, and because a struggling company is nectar to short sellers (the predators and vultures of the investing world*), short interest in GameStop accumulated over time. Eventually, the stock ended up on ‘most-shorted’ lists.

(* As an ex-biologist, I feel compelled to point out here that vultures and other predators play a very important part in biological ecosystems, and I don’t think short sellers are different or less important. Indeed, the negative sentiment that many people harbour over shorts and short-selling activities feels artificial and almost anti-Malthusian in sentiment.)

Being a gaming-related stock, GameStop was also a natural fit for a contemporary market frenzy—a frenzy that is (and has been) building for years on the back of what I’d describe as a futuristic and partially science-inspired sub-culture (that includes gaming, crypto, the financial independence-movement—all combined with a fascination for certain electric-vehicle companies’ CEOs). This, more than anything else, probably made GameStop a natural fit for subreddits like r/WallStreetBets, alongside other tech-heavy ‘cult’ stocks like AMC and BlackBerry.

To this mix, we however also need to add the growing frustration that some young people have with ‘The Establishment’, where they feel that their parents’ generation have given them the wrong advice (e.g. get a degree and you’re guaranteed a good job), without much understanding of how different economic conditions require different strategies for success. This frustration has led to a kind of ‘soft rebellion’ (perhaps best characterised by the ‘OK, Boomer’ meme), where many young(er) people feel that ‘the system’ has failed them, and that they need to take things into their own hands. This sort of frustration, when shared (especially with other common interests also in the mix), can lead to quite a strong cultural cohesion over time.

Together, these are also all ingredients that help to explain how sentiment on, for example, a subreddit can start clustering together with the ambition to extort some kind of good-natured ‘revenge’ on the idols of the financial system (e.g.hedge funds and other Wall Street ‘suits’). Once stirred, such sentiment can also easily be whipped up and concentrated through the action of charismatic leaders, to produce quite a powerful force—once unleashed on a target and equipped with the tools to make this happen (e.g. low-cost apps and the ability to buy on margin). In this way, a group of Reddit users could easily start to push up the price of a dying company’s stock with the goal of squeezing shorts out of their positions.

While journalists have subsequently been trying to make sense of the story along the lines of ‘retail investors take on Wall Street’, I think the action has more been powered by people enjoying a bit of lockdown fun and a sense of comraderie (perhaps similar to sentiments expressed in cult classics like Ready Player One). Of course, the GameStop story has taken many turns since (including trading apps like RobinHood finding that ‘democratising trading’ on margin can lead to regulatory squeezes requiring some less-customer-friendly actions), with saga eventually attracting the ire of politicians on both sides of the political aisle.

Regardless of how the saga plays out, what all observers have in common is that they’re struggling to make sense of what’s happening: Early on, on-lookers were first expressing sentiments along the lines of ‘surely, this has to be illegal?’, with whispers of ‘is this market manipulation?’ being thrown around. In the time since, the sentiment has instead shifted to something more aligned with the traders themselves, with stories being told of a brave collective David taking on the capitalist Goliath.

Initially, I was also very much in agreement with those thinking that this is only the latest episode in a centuries-long drama of market manipulation (because at this point it seemed so obvious that the redditors were just hoping to make a quick buck), but the more attention I’ve paid to this story, and the more I’ve thought about it, the more I’ve come to realise that what we’ve seeing was really a bubble developing in fast-forward. That is a lot more interesting than any old, boring form of market manipulation, as it’s a dynamic story of animal spirits and online friends ganging together for a bit of blowout fun.

I’ve previously written on this blog about the anatomy of a bubble [link], and how you can find patterns in markets (where markets crash and recover in very similar ways, [link]). With GameStop, all the ingredients are also there: We have the initial spark (the exact nature of which are likely already lost to history) that ended up with a small band of retail investors banding together and deciding to trade GameStop stock, making the price go up. From this point on, the higher the price went, the more people wanted to join in on the fun, and the more people who were having fun, the more the price went up, and the more fun people were having. This is textbook autocatalysis is action.

This autocatalytic element is also crucial to declaring something a ‘bubble’, as without it, you wouldn’t have a bubble, by definition. Indeed, a bubble absolutely requires an autocatalytic element, as this process is what drives the share price far away from its fundamental value at sufficient momentum to break through whatever efficient barriers that the market has in place, as the price has taken on a life of its own. After this point, the share price is just a number, as it doesn’t mean anything anymore: For as long as an autocatalytic process is running, valuations don’t matter. It’s just a price, a number, and it’s going up.

In bubbles, the autocatalytic element is also powered by a speculative temperament. One of the most important lessons to take away from the GameStop story is however that speculation is not always about money. Instead, speculative temperaments can be fuelled by anything—as long as it allows people to feel as if they’re part of something. (A feeling of community is a strong unifying force and being part of a group allows you to give your individualism to become part of a new, greater, emergent whole.) While onlookers have tried to cast the GameStop saga in epic terms (retail investors taking on Wall Street), I really think the unifying force with GameStop was the feeling of having a few days’ fun with your friends while pushing the limits of the financial system as if you were a carefree teenager again.

Tracy Alloway (a Bloomberg reporter who’s also active on Twitter and worth a follow) summarised this quite well when she wrote on Bitcoin, calling it the “perfect post-modern asset”, as

Its value isn’t tied to any single real thing, which means that it’s driven by narrative and networking. Because the narratives aren’t limited by reality, there tend to a lot of them. This abundance of Bitcoin ‘stories’ means it can appeal to more and more people. You want to make money? Bitcoin is going to the moon. You want to protect your portfolio from inflation? Bitcoin is digital gold. You want to avoid government scrutiny? Bitcoin is (supposed to be) anonymous and decentralised.

There’s a story for everyone, and that make it attractive to a larger number of people who then put their money into it and give it value though sheer force of belief. So the value is in the stories, and the ability of those stories to mobilise a network of people willing to buy. [emphasis mine]

Altogether, this also tells us something important about bubbles and how they form: They are not really about the money. Instead, the money (in the form of rising prices, say) is a symptom of an underlying temperamental or sentimental fervour, and we can see the same processes happen in many other systems, with or without money being involved:

(When these processes run, not in markets, but in the social sphere, we call them ‘fads’. In this way, the Beanie-Baby fad was a kind of ‘bubble’, as were memes like the ice-bucket challenge. If other people are doing something, it’s only natural for us—as human animals—to want to join in.)

With GameStop, the money wasn’t what motivated people (which means that it cannot have been market manipulation). Instead, it was the community, and the sense of banding together on a mission, that motivated people to push the share price upward, towards greater heights. In other cases (e.g. the dotcom boom), the animal spirits have of course been more smitten with the (more typical) idea of becoming rich beyond their wildest dreams, but that’s because ‘getting rich’ was the mimetic motivator. In this sense, all bubbles are different (because they’re motivated by different sentiments), but they’re also the same (because the sentiments, however different, all fuel the same processes): The sentiment is the seed (and it’s always different), but the mimetic processes that they result in all unfurl in the same way.

At its core, this type of behaviour is also contagious; taking the form of intentionally mimicked behaviour (either consciously or unconsciously), and once it’s take root, it will spread between people to amplify the popularity of whatever is in vogue. When the mimicry is strong enough, it can spill over into other topics or geographies. With GameStop, we saw this happen with other highly-shorted stocks like AMC or BlackBerry or iRobot (and last I saw, there are reports of similar short-squeezes being engineered in markets as far away as Malaysia).

Regardless of what sentiments or desires underlie the imitation games that give rise to autocatalytic processes in markets and other human networks, they all however end the same way, with a rapid deflation of interest (and prices) once the mimetic autocatalysis comes to a halt. Indeed, you wouldn’t be able to have a bubble without a crash or deflation at the other end: Without a crash, it just wouldn’t be a bubble as it suggests that no runaway autocatalysis was at play. In this way, the GameStop saga is not new or different, and all these stories also end the same way: Once the autocatalysis has come to a halt, the energies of the animal spirits will deflate, and the price (that was just the symptom of their frenzy) will follow suit. Sometimes, this marks the end of an era, while for others, the fun will go on, just in a different place.