Shiller, Robert J., Harvard International Review
Media and Misinformation in the Markets
Although the news media--newspapers, magazines, broadcast media, and now the Internet--present themselves as detached observers of market events, they are themselves an integral part of these events. Significant market events generally occur only if there is similar thinking among large groups of people, and the news media are essential vehicles for the spread of common ideas. As we shall see, news stories rarely have a simple, predictable effect on the market. In some respects, they have less impact than is commonly believed. However, a careful analysis reveals that the news media do play an important role both in setting the stage for market moves and in instigating the moves themselves.
Setting the Stage
The news media are in constant competition to capture the public's attention. Survival requires finding and defining interesting news, focusing attention on news that has word-of-mouth potential (so as to broaden their audience), and, whenever possible, defining an ongoing story that encourages their audience to be steady consumers.
The competition is by no means haphazard. Those charged with disseminating the news cultivate a creative process--learning from each others' successes and failures--that aims to provide emotional color to news, to invest news stories with human-interest appeal, and to create familiar figures in the news. Over the years, experience in a competitive environment has made the media quite skilled at holding public attention.
The news media are naturally attracted to financial markets because, at the very least, the markets provide constant news in the form of daily price changes. Certainly other markets, such as real estate, are sources of news. But real estate does not typically generate daily price movements. Nothing beats the stock market for sheer frequency of interesting news items.
The stock market also has star quality. The public considers it the Big Casino, the market for major players, and believes that on any given day it serves as a barometer for the status of the nation--all impressions that the media can foster and benefit from. Financial news may have great human-interest potential to the extent that it deals with the making or breaking of fortunes. And the financial media can present their perennial lead, the market's performance, as an ongoing story--one that brings in the most loyal repeat customers. The only other regular generator of news on a comparable scale is sporting events. It is no accident that financial news and sports news together account for roughly half of the editorial content of many newspapers today.
In an attempt to attract audiences, the news media try to present debate about issues on the public mind. This may mean creating debate on topics that experts would not otherwise consider worthy of such discussion. The resulting media event may convey the impression that there are experts on all sides of the issue, thereby suggesting a lack of expert agreement on the very issues about which people are most confused.
I have over the years been asked by members of the media if I would be willing to make a statement in support of some extreme view. When I declined, the next request would inevitably be to recommend another expert who would goon record in support of the position.
Five days before the 1987 stock market crash, the MacNeil/Lehrer NewsHour featured Ravi Batra, author of The Great Depression of 1990: Why It's Got to Happen, How to Protect Yourself. This book took as its basic premise a theory that history tends to repeat itself in exact detail, so the 1929 crash and subsequent depression had to repeat themselves. Despite Batra's significant scholarly reputation, this particular book would not be viewed with any seriousness by scholars of the market. But it had been on The New York Times best-seller list for 15 weeks by the time of the crash. …