Getting Rich with GameStop is Not like Winning the Lottery

As GameStop stock continues to surge, up 300% in just two days (at $350/share as of writing this, from $40 just last week), likely a feeling a regret has set in among those who watched the stock rise to dizzying heights but didn’t act. Such returns are magnified even more so, by a factor of 100, by buying GameStop call options, which have minted many millionaires and even a handful of 8-figure millionaires on the hugely popular r/WallStreetBets sub, as call options that traded for mere dollars last week are worth hundreds of dollars or more. A common response or rationalization for having missed out is, is that getting rich with GameStop is like winning the lottery–that is, purely by chance or happenstance–and thus you should not beat yourself up over missing out, because it is not like you beat yourself up over not winning the lottery, and no rationally-minded person would ever feel regret about having not played the lottery. However, this rationalization is probably unsatisfying and wrong. Sure there are some similarities between call option speculation and lottery tickets in that they are both risky to varying degrees with a high probability of loss, but there are a few key differences for why this comparison fails.

1. With the lottery there are only a few big winners, but on r/WallStreetBets there are pages upon pages traders having made hundreds of thousands or millions of dollars, and some even tens of millions of dollars, all in the past week with GameStop calls options, which is way more winners than even the biggest of lotteries, and with a much more favorable payout distribution compared to lotteries. The Powerball lottery has many prize tiers depending how many numbers you match, which drops off precipitously in terms of payouts as the number of correct numbers falls, whereas there are at least a couple dozen of traders on r/WallStreetBets each individually having made hundreds of thousands of dollars with GameStop call options, so the payout distribution is more like a plateau than an exponential decay curve (a power law distribution). Lottery winners, although they get some media coverage, quickly fade, but r/WallStreetBets has only grown in popularity, and traders who have made fortunes will becomes celebrities online in their own right.

2.The lottery is completely random (or at least a random as the random number generator permits) with a negative expected value intrinsic to playing–that is, the payouts and probabilities are chosen and designed in such a way that anyone who plays long enough will be ruined, but stocks have historically exhibited a positive expected value and a positive ‘drift’ (around 11% annually for the S&P 500, going as far back as the 20s, which includes dividends). Unlike stocks, which trend and thus one can make an inference about future price direction from past price movement , lottery tickets are one-off events and hence no trend or pattern can be ascertained from them (unless, I suppose, the random number generator is faulty).

GameStop had already gone up a lot and was in the news for weeks, even before it surged from $50 to $350. GameStop had already doubled from Monday to Tuesday, giving investors room to still buy, after which the stock proceeded to increase another 140% on Wednesday. Same for Tesla, which offered many opportunities for investors to buy as the stock kept going higher. It is more like, imagine a sequence of lottery tickets being drawn, and you observe that the numbers happen to follow a predictable pattern despite it otherwise assumed to be random. Surely, it would not be unreasonable to assume the pattern would continue (possibly due to some fault in the random number generator or due to human manipulation), and if did continue, you would probably regret not buying anyway despite otherwise being conditioned to believe that it is random. Do you trust your eyes or your preconceived beliefs? If you see a dollar on the sidewalk and you tell yourself that this is economically impossible, and as you are pondering this, someone snaps up the dollar, you would probably feel feel some regret for having not acted.

3. There are way more lottery numbers to choose from than stocks. If you limit your selection to stocks that are getting a lot of buzz/attention online on communities such as r/WallStreetBets, the pool of stocks shrinks even more, so rather than having to choose between one of hundreds of millions possibilities, it is more like having to choose between one of a couple dozen stocks. Of course, the obvious difference is, you need only $1 (or sometimes $2 depending on the lottery) to play , whereas call options can cost thousands of dollars, but the expected value for call options on stocks that meet the criteria of having momentum and ‘buzz’ online, is way higher than lottery tickets.

Overall, you should be beating yourself up a little bit, and it is understandable that you feel regret: there was a dollar bill (or in the case of GameStop calls, a Zero Halliburton briefcase stuffed with stacks of $100s) on the sidewalk and you failed to pick it up; you have only yourself to blame for your inaction and indecision. Sure, you may not have made 8-fgures, but turning maybe a few thousand into $50,000 or more could have gone a long way in regard to medical bills, paying off a mortgage or student loans, or other expenses.