Investigations are ongoing to see who was doing what to take GameStop’s stock to meteoric heights, cash in, and then watch it fall back down to a more normal valuation (the normal stock price is still not there as of this writing, but it’s getting there). In the meantime, it’s useful to ponder the ethics of the situation.
Start a management degree at American Public University.
(Full disclosure: I am an active investor/trader who dabbles with options. I have made reasonable returns and had some sizable losses. Now, I am working more for sensible, long-term investments.)
The Background of the ‘Pandemic Traders’
Most of the “pandemic traders” like the WallStreetBets group got in after the dramatic fall of the stock market in February 2020. They have no memory of a similar dramatic fall in December 2018 or any other sizable correction since the Great Depression.
Several commentators on CNCS have conjectured that these new day traders are former gamblers who have found a new way to take risks with their stimulus checks. The founder of Barstool Sports, Dave Portnoy, has made many appearances on the CNBS talking up his success after taking up day trading as “Davey Day Trader.” But some expert investors, like billionaire and hedge fund manager Leon Cooperman, have predicted that the situation will all end in tears for these amateur investors.
The WallStreetBets Group Was Protesting against Short Sellers
With the WallStreetBets group on Reddit, it does not take long for anyone to see there was a protest occurring against short sellers. Short selling is a viable and important investing tool. If you think a stock’s value is going down, you borrow the shares and sell them at a higher price. When the price goes down, you buy back the shares and earn a tidy profit.
Short Sellers Are Often Vilified, but Enable Markets to Function Smoothly
Short sellers are often vilified. But as Brian Beers of Investopedia points out, “Far from being cynics who try to impede people from achieving financial success—or in the U.S., attaining the “American Dream”—short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.” If there is anything present in the stock market today, it is over-exuberance.
The rebellion by WallStreetBets was definitely against short sellers, but not just any short sellers. They were after big institutions who had the ability to short-sell millions of shares, seemingly with the hope that GameStop would go bankrupt.
With GameStop and a few others in their sights, the rallying call was to buy, buy, buy more and hold with “diamond hands.” There are many problems here unrelated to the actual rebellion and short selling. People were able to open margin accounts and borrow the money to buy shares.
Pure greed and euphoria were driving the trading. You could argue that many people were playing with dynamite, thinking they had harmless firecrackers.
Should people be free to make stupid bets on questionable stocks? Sure. Should they be allowed to borrow thousands of dollars to buy questionable stocks? I would say no, but perhaps Darwin’s rule of the survival of the fittest can work in the markets, too.
Honestly, no one was there to caution me the first time I bought 1,000 shares of a “sure thing,” not really computing that every $1 down was a loss of $10. Also, no one was there to caution me to hold when a great company experienced a quick drop and “buy the dip” to average out the costs. The experience served to remind me to do the math and to have set limits for losses.
Many brokerages have excellent education materials, as mine did, but it takes time to learn. Sometimes learning the hard way just sticks better.
Was WallStreetBets Really Successful in Its Goal of Punishing Short Sellers?
If we assume that the overall goal of WallStreetBets was to punish short sellers, I question how successful it was. Thousands of retail investors lost thousands of dollars, or they are sitting on a number of shares of GME they bought north of $200 when those shares should be trading in the $20-$40 range.
It’s also necessary to remember that when we are talking institutional investors, we are not just talking investment firms. Those institutional investors are also retirement associations and pension investment boards.
While there may have been more going on behind the scenes, the crux of the GameStop situation is that a number of angry people mounted a rebellion that made a few folks — including institutional investors — very rich, but it also made more people much less rich. So if there was a greater good, it would be a demonstration of the power of retail investors to drive the price of stocks, regardless of any underlying fundamentals.
Applying Traditional Ethics to WallStreetBets and GameStop
So where should ethicists stand on this? It all depends.
Utilitarians, who focus on the outcomes of an action (the consequences), would see WallStreetBets’ actions as an immoral act. It sure seems like a perfect case of “cutting off one’s nose to spite one’s face.”
While acts of revenge can be seen as advancing the greater good, it is hard to see WallStreetBets’ actions as successful. Even if we use rule utilitarianism, it would be hard to devise a rule that would allow for ruining lives out of spite.
If we are talking non-consequentialist perspectives like Kantian Deontology or Ross’s Prima Facie Duties, there is no way any of the formulations for categorical imperatives could be applied to justify WallStreetBets’ actions as moral.
Applying Ross to the GameStop investment situation, none of the prima facie duties can be seen as applicable. Even if you rely on intuition as Ross did, there just seems to be something morally wrong with going broke just to prove a point, as long as doing so takes some others into poverty.
Even if you look to Aristotle’s virtue theory, it seems WallStreetBets’ actions are a far cry from somewhere in the mean between extremes. In fact, their actions can be seen as a vice and far from doing the right thing at the right time to the right people for the right reasons (Nicomachean Ethics, Book II, Section 9).
All of these schools of thought seem to indicate that WallStreetBets crowd acted immorally.
It might be possible to justify WallStreetBets’ actions with Ayn Rand’s version of objectivism, but can you really embrace a theory that promotes pure selfishness at the expense of others? From an ethical perspective, it would be difficult to see WallStreetBets’ action in the stock market as anything other than immoral.