FIN 405 Week 3 Emotion and Social Influence Example

The Week a Nephew Bought GameStop: Feelings, Stories and Crowds in the January 2021 Short Squeeze and What an Advisor Can Say Afterward

[Student Name]

University of Phoenix

FIN/405: Behavioral Finance

Week 3 Assignment

[Instructor Name]

[Date]

The investor and the advisor are composites written for a model paper; market dates, prices and research findings come from the public record and the sources listed.

Marcus, a composite 24-year-old warehouse supervisor in Georgia, had $11,000 saved for a car down payment in January 2021. He had spent evenings on a large online forum where members posted about GameStop, a video game retailer whose shares were heavily sold short by hedge funds. On January 25, after the price had risen from under $20 at the start of the month to about $77, he bought 100 shares. Two days later they closed near $348. He did not sell. By February 2 the price had fallen to about $90, and in mid-February it traded near $40. His uncle, a financial advisor, asked how he wanted to talk about it. Marcus's choices were driven less by spreadsheets than by feelings and the people around him, which is exactly what this week of the course examines.

What Happened to the Price

GameStop's share count sold short exceeded the shares available for trading by early January, an unusual situation that left short sellers exposed. Forum members argued that the company was undervalued and that buying could force a squeeze. As the price rose, short sellers bought shares to close their positions, adding to demand. Call option purchases by retail traders pushed dealers who sold the options to buy shares as a hedge, adding more demand. The stock reached an intraday high of $483 on January 28, when several brokers restricted purchases, and then fell rapidly.

Feelings as Information

Traditional models treat risky choices as calculations of probabilities and outcomes. Loewenstein et al. (2001) proposed that people also react to risks emotionally, and that those feelings can drive behavior when they diverge from cognitive assessments. Vivid outcomes, a quick fortune or a missed one, produce strong feelings regardless of their probability. For Marcus, the image of turning $7,700 into $50,000, posted daily by others on the forum, carried more weight than any estimate of the odds.

Regret and Missing Out

Marcus said later that his biggest fear was watching others get rich while he stood aside. Anticipated regret, the pain people expect from a choice that turns out badly, shapes decisions before any outcome occurs. Regret from missing a gain others captured can feel sharper than regret from a loss shared by many. Once he owned the shares, a second regret pulled the other way: selling at $348 and watching it go to $1,000, a target posted on the forum, would have felt worse than holding.

Herding and the Crowd

Herding occurs when investors follow others rather than their own information. Hong et al. (2004) found that households that interact socially with neighbors or attend church are more likely to invest in stocks, evidence that participation spreads through social contact. Online forums put that contact on a massive scale. When thousands post the same position, joining feels like following informed opinion even when most participants are following each other. An information cascade can form when people rationally ignore their own doubts because so many others appear confident.

The Power of a Story

Shiller (2017) argued that popular narratives, stories that spread like contagious diseases, move economic behavior and markets. The GameStop story had heroes and villains: ordinary traders against hedge funds. It offered moral meaning as well as profit, which made it more contagious. Members described holding the stock as loyalty, and selling as betrayal. Marcus held partly because selling felt like abandoning his group.

The Rational Thread

Not everyone in the episode acted on emotion. Some early buyers identified the heavy short interest and the company's improving balance sheet in 2020 and profited from a squeeze they anticipated. Short sellers who held huge positions in a thinly traded stock took a risk that analysis could identify. A fair account recognizes that rational strategy and emotional contagion operated together, which is part of why the episode was so extreme.

The Brokers' Restrictions and the Feeling of Unfairness

On January 28, several retail brokers stopped customers from buying GameStop while still allowing sales. The brokers cited higher deposit requirements from the clearinghouse that settles trades, which rose sharply with the volume and volatility of the stock. Many forum members saw the restrictions as proof that the system protected hedge funds, and the anger deepened their loyalty to the trade. Marcus said the restrictions made him more determined to hold. Emotion here worked through a sense of unfairness rather than greed or fear: holding became a protest. Congressional hearings followed in February, and regulators later reviewed settlement rules, contributing to the move from two-day to one-day settlement in 2024. The episode showed how a market plumbing problem could become a moral story that changed investors' behavior.

What Marcus Lost and Learned

Marcus held until March, when he sold at about $120, a gain of $4,300 on his $7,700 cost. He also lost the chance to sell near the peak and spent weeks anxious and distracted at work. His outcome was better than many others who bought on January 27 or 28. Luck shaped his result, which made it harder for him to see the risk he had taken.

What an Advisor Can Say

His uncle chose not to lecture. Research on emotion suggests that shame makes people defensive, while curiosity helps them reflect. The uncle asked three questions: what Marcus had expected to happen, what he felt at the peak and what he would want to feel next time. Then he suggested three steps: decide in advance what share of savings he is willing to risk on any single idea, perhaps 5 percent; write down a sell rule before buying; and put money for goals with dates, such as the car, in a savings account where it cannot be tempted into speculation.

Conclusion

The GameStop squeeze shows emotion and social influence acting on individuals and prices at once. Feelings about vivid outcomes, anticipated regret, herding and a contagious story drove Marcus's choices more than analysis did. An advisor helps most by understanding those forces and building simple rules that protect goals from the next crowd.

References

Hong, H., Kubik, J. D., & Stein, J. C. (2004). Social interaction and stock-market participation. The Journal of Finance, 59(1), 137-163. https://doi.org/10.1111/j.1540-6261.2004.00629.x

Loewenstein, G. F., Weber, E. U., Hsee, C. K., & Welch, N. (2001). Risk as feelings. Psychological Bulletin, 127(2), 267-286. https://doi.org/10.1037/0033-2909.127.2.267

Shiller, R. J. (2017). Narrative economics. American Economic Review, 107(4), 967-1004. https://doi.org/10.1257/aer.107.4.967