“GameStop/Gamestonk“ Has Nothing To Do With The Madness Of Crowds

“GameStop/Gamestonk“ Has Nothing To Do With The Madness Of Crowds

The GameStop (GME) eruption has been portrayed as the product of wildly irrational investor behavior - a "frenzy," a "speculative orgy" (Charlie Munger's phrase), a "game played by losers who don't have any idea what they're doing" - a classic case of the Madness of Crowds. This view is incorrect. Observers are misled by the fact that the market is obviously not "rational" in the finance-theoretic sense of the term. Share prices no longer reflect the underlying asset-value. GameStop's mediocre, money-losing business is certainly not 4000% more valuable than it was at this time last year. But this does not mean that the decisions of the GME traders are irrational. The GME event is in fact the result of a process that is hyper-rational. It is based on highly accurate calculations of specific outcomes which possess a much higher degree of certainty than is the case for normal investment decisions. There is no "madness of crowds" here. It is a premeditated, predatory take-down of a cornered and defenseless counterparty. Here's how it unfolded. The naive view of the stock market is based on two assumptions that seem self-evident. This is how we are taught, practically from childhood, to think about