Victor Ricciardi, a behavioral finance expert, says that the meme-stock rally this week that boosted shares of GameStop Corp. and AMC Entertainment Holdings Inc. used a number of human traits.
Ricciardi, a visiting finance professor at Ursinus College and co-author of the book “Advanced Introduction to Behavioral Finance,” talked about how the meme rally was fueled by people following the crowd. This was made worse by the fact that influential investor and analyst Keith Gill returned to social media. 1.2 million people follow Gill on X, which used to be called Twitter. She is also known as Roaring Kitty.
Ricciardi said, “Someone with millions or hundreds of thousands of followers is going to create that herd mentality.” He also said that this kind of thinking can make a group split up. He said, “People in the group make riskier choices than they would on their own.” “They’re really affected by the way the group works; people don’t want to miss anything.”
The author says that these types of behavior can be seen in the Dutch Tulip mania of the 1630s and even in the internet bubble of the 1990s. He said, “This stuff keeps happening,” but he doesn’t think the latest meme-stock rally is close to being a bubble. “It’s not a bubble that’s affecting the market as a whole; it’s more of an overreaction or an outlier event that’s affecting a small group of investors,” he said.
Gill played a key role in the 2021 meme stock buying frenzy. He posted on X for the first time in three years on Sunday. Since then, he’s been writing a lot of posts that aren’t always clear. With this in mind, GameStop GME, -30.04% stock ended Monday up 74.4% and Tuesday up 60.1%, but they gave back some of their gains Wednesday. The stock kept going down on Thursday. It had its worst two days since 2021, when it dropped 43.2%. Shares of AMC AMC, -15.33% have gone in the same direction.
He also thinks that the last few days have shown representativeness bias. He said, “That’s when people make assumptions based on a small amount of data.” “People who made money the first time think that it will happen again and believe that history will repeat itself.” The professor has talked about how representativeness bias can affect investors who bet on shares of companies that are going out of business.
Other experts have also pointed out the difference between the meme-stock rally and how well the companies involved did in real life. This week, Cory Mitchell, an analyst at the website Trading.biz, which gives information about investments, said that the AMC trade was “just pure hype.” Howard Ehrenberg, a partner at the law firm Greenspoon Marder, said that the changes in GameStop stock are not based on how well the company is doing in general. The rally also made people think of how trading became more like a game during the meme-stock craze in 2021.
Ricciardi also talked about other investing trends that have come up in the past few years, such as the fact that more and more people are getting their news from apps like TikTok instead of traditional news sources. “That alone makes a cult mentality and herd behavior,” he said. “It’s a very risky game when there are regular people investing who haven’t had much training in it.”
“It’s more of a party game,” he said.
See Also : GameStop’s meme rally is still driving sales, but the “buying frenzy” may be coming to an end.
