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This year has been interesting for Wall Street, to say the least. After hearing that hedge funds had shorted the stock of the dying retail chain GameStop by over 100 percent of shares, Redditors banded together to buy up the stock, knowing that short sales do not expire, so the hedge funds will eventually be forced to buy it all back at a drastically raised price.
Estimates of short interest on the stock from sources such as the NASDAQ, MarketBeat, Yahoo Finance, and Bloomberg range from 53 percent to 177 percent of float. Hedge funds have been shutting down retail brokers, trading among themselves after hours, and publicly claiming to cover shares they had not yet bought, all in an attempt to lower the price on the stock, minimizing losses for the hedges when they finally cover the shorts. Historical examples such as the Volkswagen short squeeze of 2008 suggest that even a short interest as low as 50 percent could still yield high dividends for GME stockholders.
With this in mind, Redditors hold GameStop under the perfectly rational desire to avoid getting tricked out of their money, and many more profess a willingness to hold despite losses if it means that hedge funds will be punished through bankruptcy for manipulating the market.
So why does the corporate press describe this phenomenon as a “bubble” that is “irrational, insane, and dangerous,” the product of the “hysteria” and “cognitive bias” of investors who “don’t know what they’re doing”? Short squeezes are not new. The Redditors’ strategies are nothing that Wall Street has not tried before. In addition, the Redditors who initially popularized the stock have a reputation for treating the stock market like a casino, as evidenced by the name of their community, r/wallstreetbets. Gambling is a form of consumption spending, an end in itself. It is not inherently irrational for someone to buy a consumer good, no matter how strange.
Moreover, the Redditors live in a world where the committee investigating the blatant fraud surrounding GameStop is led by a woman who accepted six-figure fees from the defendant. Holding the stock as an attempt at getting justice makes sense, especially from the perspective of an online community full of Millennials, who have had their economic future crippled by Wall Street financiers through three consecutive “once in a generation” market crashes. For the amateur investor, there is no rule of law on Wall Street—and revenge is a rational strategy outside the law. All of this is obvious to anyone who reads what the Redditors have to say. Their plan might be ill advised, but it is definitely not irrational. Why doesn’t the corporate media acknowledge this?
The answer is that economic rationality, like so many other terms, has been defined to suit the convenience of the neoliberal establishment. The concept of bias in economic decision-making is pseudoscientific, since its meaning can be warped to include any deviation from neoclassical economic models, even ones which are rational when put in context. In the instance of the GameStop investors, this confusion of terms is serving its purpose, pathologizing as irrational a well-reasoned populist response to a broken financial system. This crucial context is necessary to recognize that the media’s concern for the mental soundness of retail investors is only a tool meant to delegitimize them in the eyes of the public.
First, a word about irrationality. Rationality in economics is a different concept than rationality to the average person, a distinction lost upon the media pundits that bandy about the term. There is no single accepted definition of rationality in economics, but the general concept is one of maximization of self-interest, quantifiable as utility. Neoclassical economists’ models of human behavior all revolve around a strict interpretation of this definition, one that Austrian economists see as incompatible with the actual human experience. This mainstream conception of rationality excludes values that cannot be quantified from economic decision-making, painting human beings as automata competing to gain control of limited tangible resources.
When neoclassical economists’ models are compared with reality, they fail, often spectacularly. But rather than sacrifice their models to accommodate a broader definition of rationality, where humans use the means available to them to meet subjectively valued ends that can differ based on a multitude of factors, neoclassical economists of late classify those who deviate from these models as “irrational,” and make it their mission to fix them.
Enter behavioral economics, the application of the theory of cognitive bias to economic decision-making. Despite the name, it is an offshoot of applied psychology, specifically the theory of behaviorism within psychiatry. Behaviorism holds that human reactions to stimuli are either products of evolution or reflexes trained through past reinforcement. By this definition, human action is predictably irrational, and must be systematically adjusted by some enlightened outside actor in order to maximize human welfare in a world vastly different from the one we evolved to live in. In behavioral economics, the logical endpoint of this world view is the need for regulation, which behavioral economists take it upon themselves to design.
Earlier scholars of the liberty movement have performed prescient analysis of the relationship between governance and the science of human behavior. In his book, Law, Liberty and Psychiatry, prominent antipsychiatrist Dr. Thomas Szasz describes the role of such sciences as follows: “Law and psychiatry are similar in that both disciplines are concerned with norms of conduct and methods of social control…. If people believe that health values justify coercion, but that moral and political values do not, those who wish to coerce others will tend to enlarge the category of health values at the expense of the category of moral values.” Today, this medicalization of moral values has grown out of the field of psychology, where it originated, and into other fields such as economics.
Decades before Daniel Kahneman and Aaron Tversky would publish the paper that created behavioral economics as we know it, Szasz argued that the medicalization of social science would create a “therapeutic state,” one that granted power to unelected departments of experts to pathologize and thereby delegitimize abnormal social behavior in the name of the health of the citizenry. The Western world was put on house arrest for a year by the policy czars of the Centers for Disease Control and Prevention (CDC) and the World Health Organization (WHO). Psychiatrists have en masse violated the Goldwater rule, which disallows them to speculate about the mental health of a public figure they have not personally examined, in order to stigmatize right-wing populism. It’s not difficult to see the resemblance to current events. How neatly this parallels arguments to deny amateur investors access to the market for their own good, in a move that would, coincidentally, of course, benefit the hedge funds that these investors want to bankrupt.
The mechanism of the therapeutic state is the same, no matter which social science is used to implement it. Irrationality, to the behavioral economist, is the consumer’s insanity, and the behavioral economists who profess to cure it are the darlings of the Keynesian establishment. Daniel Kahneman has received the Nobel Prize. Cass Sunstein, another pioneer of the field, was appointed administrator of the Office of Information and Regulatory Affairs in 2008. Policymakers in both the private and public spheres have leapt at the chance to implement these theories. They recognize cognitive bias as a useful explanation for why the public doesn’t react as expected to policies that are supposedly in our best interest. And the terminology that behavioral economists coin makes its way into popular parlance, where it can be thrown at anyone whose actions are inconvenient to the established order—including retail investors.
From the perspective of an economist, this makes little sense. Austrian economists have had no problem incorporating economic behavior deemed “irrational” from a neoclassical standpoint into their paradigm. Moreover, many of the studies instrumental to the theories that behaviorists, and behavioral economists in turn, cite to prove human irrationality are highly flawed in their reasoning.1 In many cases, they either extrapolate beyond what the original experiment can be said to prove, have fallen victim to the replication crisis in social science, or have been shown to be the product of deliberate fraud.
Finally, as any student of human behavior should be able to predict, the ethical concerns that behavioral economists pay lip service to are ignored by policymakers in fact. These self-titled “choice architects,” using a euphemism for psychological manipulation common in the field of social engineering, assume their own immunity to the biases that they accuse others of displaying. If they cared to think about many of these cases of “irrationality” from the perspectives of the people they try to regulate, they would realize that their view of human behavior is not born of some privileged knowledge but is a willful blindness to other factors at play.
But from the perspective of an apparatchik of the therapeutic state, this economic fad makes perfect sense. These are the same people whose conception of the business cycle assumes that entrepreneurs are incapable of recognizing and correcting systematic errors in their economic calculations, even when doing so would provide long-term benefit. This view is incompatible with reality, only useful to justify endless government intervention. Is it any surprise that they want to smear every economic actor in the same way, if only to claim that their intrusions constitute a moral good?
In this light, it is inevitable that the GameStop uprising will be declared a product of “cognitive bias,” even though the only bias here is that of media companies toward the Wall Street investors who own them. Rather than admit that the Redditors’ investing behavior poses a threat to the powerful, the media condescends to them, hoping that a public unaware of the fraught history of the terminology in use will discard what they have to say. As long as it is inconvenient for these lackeys of the American aristocracy to acknowledge the rational incentives at play, they will continue to use any shoddy rhetorical tactic necessary to justify their overlords’ manipulation of the market, regardless of the impact this slander may have on retail investors. This is not science; this is graft—and unfortunately for the field of economics, it is here to stay.
- 1Gina Perry, “The Shocking Truth of the Notorious Milgram Obedience Experiments,” Discover, Oct. 2, 2013; Perry, The Lost Boys: Inside Muzafer Sherif’s Robbers Cave Experiment (Melbourne: Scribe, 2018); Carlin Flora, “A Problem with the Marshmallow Test?,” Psychology Today, Oct. 30, 2012; Brian Resnick, “The Stanford Prison Experiment Was Massively Influential. We Just Learned It Was a Fraud.,” Vox, June 13, 2018; Stéphane Doyen, Olivier Klein, Cora-Lise Pichon, Axel Cleeremans, “Behavioral Priming: It’s All in the Mind, but Whose Mind?,” PLoS ONE 7, no. 1 (2012): e29081.
