The GameStop stock situation isn’t about populism. It’s about whether the market is ‘real.’

The most popular narrative framing has been that of the populists (a phrase that doesn’t really mean much anymore, beyond just “a collection of guys who are mad”) versus the Institutions — and there’s some merit to this. On Wallstreetbets, the Reddit forum that sparked GameStop’s explosive growth, you’ll find tons of posts about growing up with little, and a near-Zen comfort with losing it all just to stick it to the hedge funds. (Never mind the lessons learned from some of the juiciest and most viral r/relationships posts.) The New York Times’s write-up closed with this quote from the wife of a retail investor: “Eat the rich.”

This is an easy way of understanding this issue because it’s the lens through which we’ve viewed much of the past half-decade. But my sister’s text reminded me that there’s an underlying distinction that is maybe a bit more accurate, at least as it pertains to movement in the stock market; it informs the insurgent versus establishment narrative. It’s this: Do you think value in the market is merely socially constructed smoke and mirrors, or the representation of an efficient, working market that follows certain rules and trends?

A brief explanation is in order.

What is a stock? There’s a technical definition, but for most nonprofessional investors, a stock is a thing you spend money on in hopes that it increases in value. When it goes down too much for you to bear, you sell. In theory, whether the value goes up or down depends on news surrounding the stock, which usually has to do with the underlying company. The underlying assumption is that the market as a whole generally goes up, so if you buy a diverse enough set of stocks, over time you are bound to make a profit. (This is the simplest explanation.)

How do people decide what to invest in? The traditional, econ 101 approach to smart investing is to look at fundamentals — the core facts around a company you might invest in. Do you think the CEO is smart, or surrounded by smart people? Does the business model make sense? Does the business have long-term prospects?

Around GameStop, two pictures formed. The conventional wisdom, based on one view of the fundamentals, was that the company was going the way of Blockbuster. The company hadn’t posted profits in years. Many of its stores were based in malls — the subjects of their own, parallel panic regarding the future of retail. Meanwhile, game purchases are swinging in the direction of digital downloads and even streaming.

The other perspective, associated most closely with Keith Gill, the Reddit user known as DeepF—ingValue and a prominent first mover on GameStop, was that the company had underlying strengths: a big base of reward points members, an upcoming inflow of money from the release of the new console generation, a new set of activist board members with a background in e-commerce. Once other people noticed, the price would go up.

Another data point also merits attention: Even in a pandemic, e-commerce only makes up a small percent of total retail.

“If your memory of the past year was erased, and I told you that a pandemic would rip across the world, rendering us all loyal supplicants to online shopping, what percent of sales would you assume e-commerce would be of overall consumption?” wrote the analyst Elena Burger. “The reality — a little over 14% of sales — is actually shocking. The takeaway shouldn’t be ‘e-commerce is eating the world’ it should be ‘despite lockdown, store closures, mass layoffs, and global logistics networks that rival militaries in terms of sophistication, e-commerce was less than 1/6th of sales in the US.’”

Still, the people who aligned with the former view, believing the stock was primed to go down, bet heavily on that outcome, in overwhelming numbers usually associated with companies at imminent risk of failure.

“Unless they thought there was obvious malfeasance, or they thought that something really bad was going to happen, then you can justify it,” said Harrison Hong, professor of financial economics at Columbia. “When you put on that big of a trade, you have to pretty much expect on the short seller side that news is imminent. … The stock is finished.”

Their bet backfired, and several prominent hedge funds suffered heavy losses as a result.

Last week, the conventional wisdom that had overtaken Twitter was that the market was all fake and not reflective of the real economy. There’s merit to that perspective, and it’s clear how a rational person might arrive at that conclusion. But it doesn’t really help to hear that the market is imaginary or fake, especially in the context of people making heaps of real money.

So when the GameStop story began to catch the media’s attention, I sought the advice of experts. How normal was all this? And did it matter if a stock was wildly mispriced?

The overwhelming answer was that all of this had happened before, in varying configurations and with different valences. Short squeezes — the technical name for when the price of a stock goes up, hurting those who bet against the stock — had happened in the past. Prominent examples, like that of Volkswagen in 2008, are taught in econ courses. And prices changing in response to signals sent by prominent investors certainly wasn’t new. Gill convincing posters on Wallstreetbets to invest in GameStop isn’t materially different from Warren Buffett saying that he likes a stock, with individual investors taking that as a signal to buy.

The issue that seemed to concern the more measured economists was that GameStop’s stock price appeared to be ballooning beyond the merits. For investors who think in terms of fundamentals, what was happening with GameStop’s stock was a slap in the face — anathema to “the point” of the market. On Friday, Sen. Elizabeth Warren (D-Mass.) penned a letter to the acting chair of the U.S. Securities and Exchange Commission, asking: “What steps will the SEC take to ensure that securities markets better reflect prices that are in line with the intrinsic and fundamental value of underlying companies?”

There’s a problem with this line of thinking. There’s compelling academic literature that suggests fluctuations in stock price often have very little to do with underlying news. In 1988, three academics from MIT and Harvard found that only about one-third of fluctuations in stock returns can be traced to specific news about a stock or company. A reassessment of that paper in 2013 was even more critical. “It is (if anything) more difficult to tie major stock price movements to fundamental economic news in a way that’s sufficient to rationalize the size of the observed move,” wrote Bradford Cornell, the author of the 2013 paper and a professor at UCLA.

But popular culture is rarely moved by academic papers. More viscerally, people observed the market going up — even as a pandemic killed hundreds of thousands and decimated the business landscape. A rational observer could find the market’s logic inscrutable: Why, for example, is Tesla valued more than big automakers that sell many more cars than Tesla? And so: If the market seems to be primed for gaming, why not get in on the fun of boosting GameStop, and make a pretty penny doing so?

More confusing still is the fact that GameStop’s inflated price could easily be rationalized.

“We only know after the fact if it was mispriced or not,” said Andy Wu, assistant professor at Harvard Business School. “If GameStop was able to raise additional capital and reposition the company, especially with the help of its activist board members, and reposition the company in a stable position to justify the stock price, then it could be a self-fulfilling, positive prophecy.”

The example of Blockbuster is instructive, says Wu. “It turns out like Netflix didn’t actually take that much market share away from Blockbuster. But the problem is they have a large store footprint and like a large fixed cost base. And so you don’t have to steal that much share from like Blockbuster in order for Blockbuster to go bankrupt,” said Wu. “Imagine now if Blockbuster suddenly had access to an overpriced stock price and could have extra capital to sustain itself as it bought itself time to sell off its stores. Then that time selling off the stores is enough time to avoid the bankruptcy risk and justify a higher stock price.”

There’s a continuum of outcomes when it comes to mispriced stocks. Melvin Capital, which lost billions of dollars shorting GameStop stock, is not really essential to the health of the financial system. But if the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google/Alphabet) were found to be severely mispriced, that could have enormous consequences.

“If you’re just wrong as a society in terms of where you place your bets about businesses, ultimately that’s pretty bad,” said Hong. “These companies won’t grow, your money won’t grow. People who decide to work for these sectors — their careers won’t grow.” One targeted mispriced stock, especially at GameStop’s tier, probably doesn’t matter, though.

That’s where the insurgency narrative starts to fall apart. Gill and the hedge fund managers have a roughly similar understanding of the mechanics of the market; they simply disagreed on the prospects of one or several stocks at the margins. But the people who have driven GameStop’s stock up — those amused by the prospect of buying stock in a store with an annoying-to-bad reputation among gamers, those who wanted to get into the communal aspect of investing with their friends, and now those, like my sister, who simply want to get rich — don’t view the market in those terms.

Some analysts have described GameStop and other stocks like it as “meme stocks.” They’re right, in a sense.

If you are a younger person, you’ve probably encountered an older relative or friend sharing a meme well after it expired from popular culture. On Inauguration Day, everyone got a kick out of Sen. Bernie Sanders’s mittens. A few days later, the meme was over, driven into the ground by the zealously online. Not so to your extremely offline relatives. But by the time they got to the joke, the spark was gone. So it will be (probably) be with GameStop.

The conventional wisdom around stocks is to buy index funds — an asset that fluctuates up and down parallel to the general market (which, as we’ve learned, tends to go up in the long run). The underlying logic is that by the time you, a nonprofessional, learn about a promising new stock, institutional investors have already taken action. You’ve missed out on the biggest moves.

Some brokerages, such as Robinhood, have been accused of encouraging amateur investors with little experience in or understanding of the market to use the app. In December, regulators in Massachusetts accused Robinhood of using gamification — such as colorful confetti that appeared on-screen after deposits and trades — to “incentivize continuous and repeated engagement with the application.” The securities regulators listed examples of the kinds of traders on the platform: “Since February 1, 2020, Customer One has made 12,748 trades with Robinhood, an average of approximately 92 trades per day during that time frame. Customer One had no investment experience prior to trading with Robinhood,” the filing alleges.

By prioritizing onboarding investors over educating them, brokerages such as Robinhood might exacerbate the risks around volatile stocks including GameStop. If you just learned about GameStop’s promising stock, you’ve probably already missed out on the most astronomic growth. But even if GameStop goes on to reach progressively higher peaks, if you’re not a Wallstreetbets lurker or hanging around the Discord server — in other words, if the GameStop news takes a while to reach you — you might miss the signal, spoken or implicit, to sell.

That sell signal can come from anywhere, at any time. Gill might announce he’s selling his shares. Elon Musk might tweet that he’s done with GameStop. However improbably, the SEC might take action. Brokerages might restrict your ability to buy or sell shares, as Robinhood did last week. And if you’re just not plugged in — if you’re in a meeting or in class or asleep — you still open yourself up to risk.

“At some point it ends. Famously, the market can stay irrational longer than people can stay solvent,” said Harry Mamaysky, professor at the Columbia Business School. “I feel like this is the kind of thing that everyone can lose money on. It’s one of those situations where it’s not obvious that it ends well for anyone. … I think when it all ends, it’ll be very, very obvious to everyone how it should have ended.”