These behavioral trends drove the GameStop and AMC meme-stock rally

By James Rogers

Herd mentality and group polarization played a part in the GameStop and AMC rallies, says academic and author Victor Ricciardi

The meme-stock rally that lifted shares of GameStop Corp. and AMC Entertainment Holdings Inc. this week tapped into a range of human behaviors, according to behavioral finance expert Victor Ricciardi.

Ricciardi, a visiting finance professor at Ursinus College and co-author of the book "Advanced Introduction to Behavioral Finance," highlighted the role that herd mentality played in the meme rally, which was fueled by the return of influential investor and analyst Keith Gill to social media. Gill, also known as Roaring Kitty, has 1.2 million followers on X, formerly known as Twitter.

"Somebody who has millions or hundreds of thousands [of followers] is going to create that herd mentality," Ricciardi said, noting that herd mentality can also lead to group polarization. "Members of the group make riskier decisions than they would as individuals," he said. "That group dynamic really affects them - people don't want to miss out on something."

Related: AMC meme-stock rally 'is just pure hype,' analyst says

These behavioral trends can be seen in the Dutch Tulip mania of the 1630s and even in the internet bubble of the 1990s, according to the author. "This stuff repeats itself," Ricciardi said, but he feels that the latest meme-stock rally is nowhere near being a bubble. "It's not a bubble affecting the overall market, it's more of an overreaction or an outlier event that's concentrated on a small group of investors," he said.

Gill was a pivotal figure in the meme-stock-buying frenzy of 2021. On Sunday he made his first post on X in three years, and followed that up with a series of often cryptic posts this week. Set against this backdrop, GameStop (GME) shares ended Monday's session up 74.4% and closed up 60.1% on Tuesday, before paring back their gains Wednesday. The stock's slide continued Thursday and suffered its worst two-day stretch since 2021 when it fell 43.2%. AMC (AMC) shares have followed a similar trajectory.

Ricciardi also sees representativeness bias in the events of the past few days. "That's when people draw conclusions from a small amount of data," he said. "For people who were successful last time, they think history is repeating itself and they are going to make money again." The academic has previously described how representativeness bias can play a part in investors gambling on shares of bankrupt companies.

Related: GameStop's meme-stock rally is a 'short-term baseless frenzy,' brokerage CEO says

Other experts have also noted the disconnect between the meme-stock rally and the actual performance of the companies involved. Cory Mitchell, an analyst at investing-information website Trading.biz, described the AMC trade as "just pure hype" this week. Howard Ehrenberg, a partner at law firm Greenspoon Marder, noted that the movement in GameStop shares is not based on the company's fundamental performance. The rally also sparked memories of the "gamification" of trading that occurred during the meme-stock frenzy in 2021.

Ricciardi also highlighted the emergence other investing trends in recent years, such as people getting their news from the likes of TikTok, rather than traditional sources. "That, in itself, creates a cult mentality, herd behavior," he said. "It's a very dangerous game when you have retail investors who are not necessarily trained in investing."

"It's more of a parlor game," he added.

-James Rogers

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05-18-24 1135ET

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