Moral Hazard in Action in 2021
The GameStop phenomenon opens our eyes to moral hazard’s true effect
In January 2021 we saw an amazing phenomenon when people on Reddit banded together to buy up stocks for companies that were being shorted by hedge funds.¹ Hedge funds were shorting the GameStop stock by 140%, meaning they shorted more shares of stock than even existed for the company. They all thought the company was going under, or at least would be dropping in value substantially.
It’s not an unfair assessment, considering retail businesses were shutting down nationwide thanks mostly to the forced lockdowns. Gamestop is the Blockbuster Video equivalent of video games — people were buying their games online mostly and there was a decreasing need, or so it was believed, for a company like GameStop.
But there are other reasons to argue against it — video games are more popular than ever thanks to the pandemic and the need for used games is still there, not to mention there were new consoles coming out for the holiday season. Microsoft and Sony’s incompetence in keeping supply above demand is another story…
So people on Reddit decided to take power into their own hands and buy up the GameStop stock to raise it from $4 all the way up to over $400. The hedge funds understandably freaked out because their…
