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WallstreetBets — why it is foolish to do and also foolish to abolish

No, it is not David versus Goliath. It is Mob versus Mafia. It is not an intelligent revolt at all. Therefore it will accomplish nothing except for hurting the participants (the mob).

Guess who made money in all this?

Only two groups of people made money:

First group is those who were really wrong about business of the company (GameStop in this case) but accidentally got rewarded when the stock price went up unexpectedly.

The second group is again the people who always study the system and learn how to manipulate it (not Melvin Capital this time, but some other Wall Street funds, and could be another hedge fund). They knew the revolt couldn’t sustain itself and therefore placed new shorts against the company with carefully adjusted timing, just to reap huge profits when the price did collapse.

The fact that the first group gets rewarded may seem to be harmless but really is a problem to the economy as a whole, because the reality signal has been distorted to reward stupidity instead of business insights. According to the theory for cybernetics, a complex system like an economy is always hurt when the reality signal is distorted because it is through the reality signal that the system recursively learn and advance (see below for more).

The fact that the second group gets rewarded is precisely the opposite of the mob was trying to accomplish.

I also hate the corrupt system that allows market manipulations by the powerful. But this isn’t solving the problem.

Mob revolt is not based on intelligence but emotion, and is easily manipulated and ends up hurting the mob itself.

Should it be forced to stop?

If it is so foolish, should it be forced to stop, or even made illegal by introducing a new law and regulation?

No, because that would be equally foolish. Again, according to the theory of cybernetics, a complex system requires a requisite variety to advance. The system needs to learn, recursively, and learning requires not only allowing things that may not make sense according to the prior knowledge, but also a real incentive/penalty feedback mechanism.

Both are necessary.

Regulation is a negative to the system if it damages the requisite variety; bailout is a negative to the system when it distorts the incentive/penalty feedback mechanism.

Every error has a cost to the system, but as long as the system’s overall gain exceeds the cost, the system will improve.

But the trouble is that certain elements or activities are cancerous. Cancer may seem to add to variety, but in reality not only destroys the variety by excessively reducing the generation and growth of other elements and activities, but also fundamentally destroys the purpose of the system.

So the most important wisdom a society as a system can learn is the ability to tell cancer from other activities. Trying to kill activities just because they seem to be stupid is usually not a good policy.

We need intelligent solutions. Individuals need to learn how to behave intelligently and responsibly, but the system needs to be able to fight against the frauds and predators.

Unfortunately, we have neither at this point of time.