Recent news has been abuzz with a store that had its heyday a decade ago: GameStop. Not because of the store itself, but for the fact that thousands of people on Reddit decided that GameStop would serve as their stand against Wall Street.
GameStop’s stock value is declining and hedge funds were short-selling it. That means they were borrowing stock in GameStop with a promise to return it at a later date. While they were borrowing it, they sold it to other people at current market prices. They planned to buy the stocks back later, once the price had fallen further. Then they would return the stock they borrowed and pocket a tidy profit. Or that was plan anyway. What happened instead is that buyers descended on the market, purchasing stock in GameStop and driving up the price. Now all the hedge funds that had shorted the stock had to buy it back at a price far, far higher than they sold it for. So much GameStop stock was involved that losses to the hedge funds tally in the billions of dollars.
The GameStop Gambit™ was notable not only because of its effects, but because…it worked. GameStop buyers spent their own money – up to $300 a share – to buy essentially worthless stock. And just a few buyers wouldn’t have moved the price: to work, the gambit had to involve thousands of people.
A large amount of research indicates that humans, as a group, are willing to take on substantial personal cost to punish others who are behaving in ways that seem harmful or unfair. And Wall Street is certainly a likely target: surveys show that a majority of Americans believe Wall Street does more harm than good and there is consistent public support for additional measures to “hold Wall Street accountable”
Even people’s willingness to punish, however, has limits. No matter how much they hated Wall Street, every buyer in this scenario had an incentive to wait and see if other people were going to buy; then they would get the satisfaction of seeing the hedge funds punished without having to spend any money. This is the collective action problem and it’s a problem that’s hard to solve: when everyone sits there hoping someone else will contribute, no one contributes, and whatever they group was trying to accomplish doesn’t get accomplished.
Of course, in the case of the GameStop Gambit™, the collection action problem was solved. Regardless of how you feel about the gambit, you should be impressed that they managed to pull it off. Hooray for the little guys! What can’t people do when they work together!
But it is doubtful that collective action would be able to control Wall Street over the long run. Bringing down every hedge fund in the US would require sustained attention, effort, and quite a bit of money. Most people don’t hate Wall Street enough to keep investing at GameStop levels, especially if other people stop contributing as well.
So what should GameStop sympathizers do about the collective action problem? Throughout history, most societies have solved the problem with government. A well-functioning government solves most collective action problems by making them unnecessary. Government gathers collective resources and uses them to enforce desired outcomes, so the citizenry don’t have to keep showing up en masse to make things happen. If we want it to, our government has the means to regulate Wall Street to prevent the sorts of outcomes that are making people angry. Then the big guy would be taken out by the even bigger guy and the little guys could stop worrying about it and go back to Redditing.
For those who are cheering on the GameStop Gambit, consider organizing instead to demand regulation. It’s a far more permanent solution…and you won’t end up with a bunch of stock in GameStop.
Wait! We can explain! 