Herding Mentality in the GameStop Short Squeeze: A Case Study

Project by Polygence alum Prateek

Herding Mentality in the GameStop Short Squeeze: A Case Study

Project's result

Research paper

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Summary

Engaging a broad base of retail investors and threatening several institutional investors, the 2021 GameStop short squeeze was an economic event, reminiscent of the herding mentality that has been observed in various other bubble events. To examine the role that herding mentality played in the short squeeze, this paper addresses the following research question: what impact did the herding mentality among retail investors have on the price of the GameStop stock during the 2021 short squeeze? To do so, this paper utilizes a case study research methodology that cross-examines the GameStop short squeeze with Hott’s theoretical framework on herding mentality. While the Hott framework accurately describes how an initial positive signal sparks a bubble and how a positive feedback loop causes asset prices to increase through a herding mentality, the framework maintains an assumption that the herding mentality is information-based, without recognizing that it can be emotionally driven, especially through social groups. Moreover, the framework also fails to recognize that a bubble does not necessarily burst due to investors receiving new information, but can also burst due to the intervention of economic institutions. These findings show that our understanding of herding mentality needs to be updated to incorporate the potential social moods that can drive coordinated efforts which can become dangerous as information, sentiments, and collectivism can rapidly spread through digital platforms to reach a broad audience of investors. This has the potential to threaten market stability and repeatedly cause disturbing phenomena such as asset bubbles and crashes if left unaddressed.

Jonathan

Jonathan

Polygence mentor

MS Master of Science

Subjects

Quantitative, Product Design, Business, Social Science

Expertise

Economics, Social Science, and Business and Product Development

Prateek

Prateek

Student

Hello! My name is Prateek Nedungadi, and my Polygence project is on Behavioral Finance. I chose this project because I wanted to research psychological theories on market influence and the human impact on the market. After the project is done I would like to publish it.

Graduation Year

2025

Project review

“My mentor was prepared, knowledgeable and helpful in my process of writing the paper. The writing feedback significantly helped in improving clarity and fleshing out the paper.”

About my mentor

“He's very helpful in talking through your ideas and guiding you to next steps and figuring out what's missing/still needs to be done. He will help you plan and structure your paper and suggest some feedback. However, he emphasizes you doing most of the decision-making and ideation. He will help you with some activities and practices to build a better understanding and have a concrete plan but it is up to you to lead the meetings.”