Herding Mentality in the GameStop Short Squeeze: A Case Study

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.