Favorite parts of the book. . .
For my entre 490 midterm, I choose to read the Misbehaving by author Richard Thaler. I choose this book because the title sounded cool. I did not expect to find the book to contain similar scenarios as the drama between Wall Street and the Reddit community of WallStreetsBets. I had a great time reading the book and exploring how behavioral economics can affect people’s decisions when rationalizing bets on stocks.
On January 22, 2021, users of the WallStreetBets community banded together to short squeeze GameStop stocks by purchasing and pushing the stock price up 600% by January 26, 2021. WallStreetBets tactics have left a huge mark on history for eating the rich and starting a conversation about the disparities in trading between retail and hedge fund investors. The aggressive trading strategies and profane culture aligned well with the behavioral economic content expressed in the book.
My favorite two favorite portions of the book were Mental Accounting (part 2) and Finance (part 5). I enjoyed these sections the most because the content explained some of WallStreetBets investing behavior.
In the chapter on Mental Accounting, I found The House Money Effect to be the most interesting theory in this section. The House Money Effect occurs when people win some unexpected money. They tend to be more reckless with their money. In the book, Richard uses casino gamblers to demonstrate his point. Gamblers become more aggressive with their strategies and are willing to make risker bets when they are given the option to win more money, even though the chances of winning are a lot slimmer. Their mental accounting ability goes straight out the window when people win some “house money”. Regular people will not make those kind of risky bets because there is a chance they will be loosing their own money.
The House Money Effect theory can be applied to WallStreetBets. User’s mental accounting went out the window when they started making some money off the GameStop stocks. They were willing to pump money into the GameStop stocks in hopes of shooting it to the moon. If it weren’t for the first initial winnings, a lot fewer people will put money into GameStop since the company was on the decline.
My second favorite part of the book was the Finance section. I enjoyed the names that were used to describe retail traders. One of the names was “noise traders”, which described people who trade and “makes decisions based on SIFs[1] rather than actual news.” (pg727). Additionally, the author associates noise trades with the term “Idiots” because they trade by following the hype around them. Their investment actions are no better than a random bet.
The Finance section of the book reminds me of the behavior of the WallStreetBets users. They all are hopping on the gravy train to the moon. The community grew about 2 million new users since the GameStop event on January 21, 2021. The new 2 million users are following suit in hopes to make it big. It is a huge gamble because those people are investing a large amount of money into those stocks. As of February 1, those stocks have fallen quite a bit. It is fitting that the group call themselves “degenerates”, in the field of Behavioral Economics they are known as the “idiots”.
Overall, I enjoyed the book. It did not feel like I was reading it for an assignment but instead research about WallStreetBets.
[1] supposedly irrelevant factor
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