Efficiency versus Emotion: An Analysis of Irrational Investor Behavior in the Gamestop Phenomenon

This thesis investigates the behavioral forces behind the GameStop short squeeze of 2021, examining how digital communities and social media–amplified emotions like Fear of Missing Out (FoMO) can generate temporary market inefficiencies. It asks whether such phenomena challenge the assumptions of the Efficient Market Hypothesis (EMH) in today's interconnected financial landscape.

Context
The context of the research is rooted in an unprecedented market event in 2021, during which retail investors, primarily coordinated through the Reddit forum r/wallstreetbets, collectively purchased GameStop shares. This surge caused the stock to reach prices far beyond what could be justified by the company’s financial fundamentals. The coordinated behavior was not purely speculative but often emotionally driven, portraying the stock as a symbol of retail resistance against institutional short sellers.

Objective
The primary aim of this thesis is to explore whether irrational investor behavior, particularly when amplified by social media platforms, can temporarily refute the assumptions of the Efficient Market Hypothesis (EMH). By investigating specific emotional and cognitive mechanisms, such as herd behavior and FoMO, the study seeks to understand how these dynamics influence asset pricing in ways that go beyond what fundamental data can explain.

Mixed-Method Approach
The methodology combines three components:

1. Theoretical foundation
   A comprehensive literature review on financial economics and behavioral finance, with particular focus on the Efficient Market Hypothesis (EMH), Prospect Theory, and emotional biases such as FoMO and herd behavior.
2. Case study
   An in-depth analysis of the GameStop short squeeze, supported by academic research, market data, and empirical findings from previous studies on trading volume, abnormal returns, and sentiment-driven price movements.
3. Experimental survey
   A scenario-based online experiment simulating investment decisions. Participants were presented with fictional scenarios involving a company named AI Technology Ltd.

• In Scenario 1, investment advice was offered solely by a professional financial expert, recommending a cautious, long-term approach.
• In Scenario 2, participants received the same expert advice, but with an additional message from a social media influencer encouraging quick, collective action and promising high short-term returns. This second message was emotionally charged, aiming to trigger FoMO.

Results
Although the experiment did not reveal a statistically significant overall difference in FoMO or investment intention between participants exposed solely to financial expert advice and those also exposed to social media influencer advice, it did uncover a significant interaction effect when accounting for education level. Specifically, participants without a bachelor’s degree reported significantly higher levels of FoMO when exposed to the combined expert and influencer advice compared to similarly educated participants in the expert-only condition. Conversely, participants with a bachelor’s degree or higher experienced lower FoMO in the influencer condition. These findings indicate that educational background moderates emotional susceptibility to social media–driven investment narratives, aligning with behavioral finance literature and echoing dynamics observed during the GameStop short squeeze.