The Psychology of Retail Investing: Why Meme Stocks Go Viral Fact-Checking the Hype Behind the Hysteria

The Myth: "Meme stocks go viral because of fundamentals—people finally recognize their value."

It's a comforting thought: the internet, in its infinite wisdom, uncovers hidden gems in the stock market. A struggling company’s share price explodes overnight—not because of market manipulation or hype—but because savvy retail investors recognize a diamond in the rough. The Reddit crowd, in this narrative, is portrayed as a decentralized analyst army correcting Wall Street's blind spots.

This is the story that captured headlines during the GameStop and AMC frenzies. Many genuinely believed that the stock surges were rooted in financial logic—strong brand loyalty, high short interest, or untapped business potential.

But is this myth true? Are meme stock surges really driven by rational reassessment of value?

Let’s investigate.

Step 1: The Data Doesn’t Add Up — Literally

If meme stocks surged due to fundamentals, we'd expect to see:

• Improved earnings reports

• Strong growth prospects

• Industry tailwinds

But during the GameStop (GME) peak in January 2021—when it soared from $17 to $483—none of this was true. In fact, GameStop’s financials worsened in 2020:

• Revenue dropped 21% year-over-year

• Net losses expanded to $215 million

• Its P/E ratio was non-existent (no earnings)

AMC showed a similar pattern. Despite teetering on bankruptcy, its stock exploded over 3,000% in 2021.

Conclusion: If fundamentals were the trigger, traditional investors would've piled in long before the Reddit crowd did. But they didn’t.

Step 2: Behavioral Science Tells a Different Story

To understand meme stocks, we need to explore behavioral finance, not balance sheets.

1. Social Proof and Herd Mentality

Psychologist Robert Cialdini defines social proof as our tendency to copy the actions of others in uncertain situations. In meme stock forums, this effect is magnified by:

• Upvotes and comment counts

• Screenshots of “YOLO” gains

• FOMO (fear of missing out)

A 2022 study in The Journal of Behavioral Finance confirmed that retail investors often follow viral trends on social media, regardless of financial fundamentals. When a stock begins trending, buying activity increases even among those with no prior interest.

2. Narrative over Numbers

Humans are wired for stories, not spreadsheets. Redditors weren’t just buying stocks—they were buying revenge against Wall Street. The GameStop saga was framed as David vs. Goliath, with hedge funds as villains and Reddit users as folk heroes.

According to a 2021 study in Nature Human Behaviour, emotional narratives can strongly influence investment decisions, especially among novice investors.

3. Confirmation Bias and Echo Chambers

Reddit threads often act as closed loops—once a stock starts gaining traction, only bullish posts get attention. Dissenting voices get downvoted or dismissed. This encourages confirmation bias, reinforcing beliefs that the stock is undervalued or "going to the moon."

Step 3: Historical Precedents — We've Been Here Before

A network error occurred. Please check your connection and try again. If this issue persists please contact us through our help center at help.openai.com.