The recent buyup of GameStop stock to undercut the hedge fund shorter has caused a dangerous situation. The attempt to punish Wall Street has created a frenzy of manic buying the likes of such the world has never seen. The result has been the loss of tens of billions of dollars for hedge funds. Those who attempt to bolster GameStop stock are doing so to make a statement against the Wall Street establishment. It’s been working to a point. This pumping of the GameStop stock carries the potential for dangerous behaviors that might have a negative long-term impact.
A new addiction
According to Bloomberg, the frenzy fueled over the morality movement to hold Wall Street accountable for its actions is creating a new problem of its own. The resulting dopamine high is akin to the familiar rush that gamblers feel when they sit at the table. So far, the collective effort has resulted in a big rush where investors are hitting it big. They’re doing it over and over again. It’s a form of democratizing the markets that are also creating the framework for serious gambling addiction. This is commonly seen during stock frenzies. A massive win can cause a thrill that causes the brain to release the chemical dopamine. The joyful feelings that result can lead to feeling invincible. This can necessitate the urge to make larger investments and take higher risks. It’s a recipe for disaster in the investment world. It causes impulsivity that can transfer into other areas of life. Reckless investing generally results in the loss of money. The larger the investment, the higher the losses.
A call to ignore the GameStop mania
The Motley Fool offers a single reason why you should ignore the current mania surrounding GameStop. They explain that it’s not just about the money. It’s more about your mental health. Many people consider investing in the stock because of the astronomical returns on investment that others have received. Other notable stocks that are also on the rise from the same type of trading activity include Express, Blackberry, and AMC Entertainment. The word has spread quickly. It continues to fuel the frenzy of investing. For many investing in other segments of the market, the results are going to be less satisfying. The movement that targeted Wall Street for a comeuppance focused on GameStop stock. While the Reddit investors took on Wall Street’s hedge funds and triumphed, the outcome is not likely to be the same for other companies squeezed by hedge betters.
The good and bad of the stock market
There is a positive side to the stock market. When it’s at its very best it’s a venue for creating wealth that can be spread around to everyone involved. People are free to buy and sell and to make the most possible profits on their investments. When the market is at its worst, it’s a huge betting pool similar to a casino. When everyone wants to make a fast buck, it quickly becomes a zero-sum game where some lose and some win on each trade. Stakes are driven higher and squeeze become more impactful. At this point in the GameStop mania, all investors bet that there will be someone who comes along to invest behind them. This is necessary for the rise in profitability to continue. If trading takes a dive than investors who just made their investments are at risk of suffering a loss on the investment. If everyone sells the stock and no others invest, the lack of activity will also cause a drop in value.
Loss aversion
Loss aversion is a theory that was developed by Amos Tversky and Daniel Kahnemann. It suggests that the psychological pain of loss is double the impact of the joys experienced when there is a gain. This theory helps to explain the danger of entering the GameStop mania as those who become accustomed to winning are likely to experience a profound psychological event if there is a loss from an investment. It’s possible to enter a phase of greed that triggers excessive behaviors in investing. After experiencing substantial gain, not even further gains will be satisfied because of the larger precedent that has already been set. This can trigger an increase in risk-taking behaviors for some, which results in not paying attention to the common-sense rules of investing to avoid loss. It’s a phenomenon that drives a person to take increasingly larger risks will less satisfaction for smaller gains. Steps are not usually taken to prevent losses when there is the belief that a larger gain is possible. In short, it’s as though all common sense goes out the window and a person’s barometer for gauging common-sense loss avoidance is rendered dysfunctional.
The best investment solutions
To avoid the perils of negative psychological impacts, it’s more beneficial to invest in long-term stocks that you can buy and hold. This takes away the necessity and sense of urgency for monitoring every movement of the market. It decreases the stress that can catapult investors into reckless or paranoid behaviors and there is less likelihood of becoming obsessed with the need to go for bigger and bigger gains.
The number one reason for avoiding the GameStop Mania
The events that are currently taking place with the GameStop investment frenzy pose the risk of becoming negatively affected on a psychological level. It’s a kind of phenomenon that happens when gamblers experience a big win. Smaller wins are not as satisfactory and there is an urge to take bigger risks in hope of larger rewards. Investors who get caught in this cycle throw caution to the wind and cannot find satisfaction in gains that would have otherwise have thrilled them. Avoid getting caught up in the cycle of unrealistic expectations and realize that this is somewhat of an anomaly that can also leave you in a state of loss when and if the tables turn the other direction.
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