The central feature is a high price together with a trading frenzy.

This is the widespread and inevitable pattern. Palm price was high, but Palm trading volume was astronomically higher than 3Com.

Stocks as Money pursued an analogy. Well, money is overpriced relative to bonds. You don't get interest on money. So is it irrational to hold money? No, as nobody holds money for long periods of time.

Nobody holds gamestop for long periods of time either. Yes, gamestop is overpriced. Yes, over the long run, which may be years, it will yield a low, almost certainly negative return. But suppose you think you read the reddit chat rooms, and you think it will go up 20% next week. That the stock is overpriced, and has a long run negative return, perhaps even -1% per week (50% a year, a huge negative return) Well, the 1% is just a small cost of doing business. High frequency traders do not care about overpricing!

Supply

Now, a first rule of thinking like an economist is that there is always supply and demand. Even if there is a huge, irrational demand for shares, then there should be a supply of shares. For a price to surge, we need a limit on supply.

Short selling is both a way to express a negative opinion, but it is also a way to supply shares to a market where more people want to hold gamestop than there are shares available. Here's how it works. A has gamestop shares. B, the short seller, borrows those shares from A, and sells them to C. Now both A and C can have long positions in the stock. We have doubled the supply of shares.

Alas, this mechanism is imperfect. It only lasts a day. B must be ready to buy back the shares the next day and return them to A. If the market goes up, B loses money, and must post that cash. The market can be irrational longer than you can stay solvent. There are also all sorts of legal and regulatory restrictions on short selling. Here Lamont's Go Down Fighting is superb.

Now the fun can happen. B might buy the shares, and lend them again to A. It can happen that the shorts have borrowed more shares than are outstanding, and physically cannot buy enough to repay them the next day. The price skyrockets. Big railroad barons used to do this. This event has been described as democratization of short squeezes, via coordination on the internet. It all gets worse when the short sellers are hedge funds, who have borrowed money to play!

Short selling is a crucial supply mechanism. A lot of regulation is devoted to propping up stock prices, and thus hobbling short selling.