I give a lecture at work every Wed and I try not to talk too much about current news, but as it was close to a topic I did for my PhD, I tell people to "do something meaningful", so I talked about the stock market this week.
Recently, a stock called Gamestop made headlines when a group on Reddit raised its price and then crashed. Not only that, but since Corona, the real economy has been sinking while the share price has been rising. Many people say this is strange, but it is not strange at all.
First of all, the markets are not as connected to the rest of the world as people think. For example, if you go to Bali's local market n the morning, you will find that the banknotes are tattered and stained. You won't find such notes in supermarkets or cafes in Canggu, where we live and many foreigners. This different status is one sign that banknotes are not circulating in these two markets.
Similarly, the stock market and the real economy are two very different markets. For example, the Central Bank of Japan, with over $40 billion in shares, is the largest holder of shares in Japan, with maybe 10% of the stock in the country. Other central banks do the same, holding shares and buying corporate bonds to keep money flowing into the financial markets. Unlike the gold standard era, the central bank can issue as much paper money as it likes. In this situation, people are eager to invest.
I'm finally here, but one of the topics of my PhD at Oxford University was minority games. A minority game means that you choose an option that the majority of people would not choose in a two-way choice situation. If there are two ways to get from point A to point B, it is better to choose the empty one. However, if path 1 is free this time, and many people choose path 1 the next time, then path 1 will be crowded. This logic is why it is challenging to be in the minority.
The stock market is also a game of two choices, and it is a minority game in the sense that you want to be on the minority side. If there are more sellers than buyers, the price will go up because more people want to buy. In that situation, it's better to sell. In the opposite situation, the price will fall. This readying-other's-mind situation is the idea of the minority game, especially for those looking ahead to the future and looking for investments. These are the people who bet on Gamestop to go bust. In an attempt to give them a run for their money, a group of people on Reddit have gone against the grain and raised Gamestop's stock. In a game usually played by an unspecified number of people, no rule guarantees you will be in the minority. This logic is because if the rule is discovered and spread widely, then by using it, you become the majority. But there is only one way to control the minority game, and that is through a system of communication that can reach many people simultaneously, like a broadcast that controls traffic congestion. And that's what the Reddit group has done.
The rise and fall of Gamestop's share price over the past series have not been about the value of the company. It's a gamble on what others will do. I ended today's lecture by saying that we should create something meaningful and build an organization that is valued for that ;-)