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Irrational Exuberance

The News Media

The history of speculative bubbles begins approximately with the advent of newspapers. Although the news media present themselves as detached observers of market events, they are themselves an intrinsic part of these affairs. Media Houses are essential vehicles for the spread of ideas. They play an important role both in setting the stage for market moves and in prompting the moves themselves.

 

THE ROLE OF THE MEDIA IN SETTING THE STAGE FOR MARKET MOVES

Survival for the media house industry requires focusing attention on news that have word of mouth potential and displaying stories that can capture the audience's attention. The financial market provides constant news in the form of daily price changes. The financial markets can present their everlasting lead, the market's performance, as an ongoing story- that in turn brings in the most loyal repeat customers.

 

MEDIA CULTIVATION OF DEBATE

In an attempt to lure in audiences, the news media endeavours to present debates about issues of national interest. Predictions of stock market crashes are displayed quite rarely on national news shows. During the conduct of these debates, the media often disseminates ideas that are not supported by real evidence. Due to this, the consciousness of the public is constructively narrowed.

 

REPORTING ON THE MARKET OUTLOOK

There is a shortage within the media accounts of relevant facts or considered interpretations of them. The news story may talk about typical factors behind economic growth, such as the Internet Boom. It is the nature of sound-bite-driven media that superficial opinions are preferred to in-depth analyses.

 

RECORD OVERLOAD 

The media is known for amplifying record highs. While talking about the stock market, many writers mention "record one day price changes" measured in points on the Dow Jones rather than through percentage terms. This impression that novel and significant records are being set repeatedly encourages an avoidance of individual assessment of quantitative data.

 

DO BIG STOCK PRICE CHANGES REALLY FOLLOW BIG NEWS DAY?

People often believe that it is the reporting of serious news events that affect the financial markets. It was observed that days with news of significant world events corresponded to days that saw big stock price movements. News events that represented crises were more likely to influence the market prices.

 

TAG-ALONG NEWS

News stories that occur on days of huge price changes often cannot account for their changes or at least not their full extent. The collapse of the United Airlines (Erstwhile: UAL) buyout had a huge impact on the entire world because its failure was viewed by the market as a watershed event foreshadowing that other such pending layouts would also fail soon. People mostly react to news as an interpretation of the behaviour of investors. 

 

THE ABSENCE OF NEWS ON DAYS OF BIG PRICE CHANGES

There have also been days where there are unusually large price changes without any exceptionally important news coinciding with it. A multitude of factors may cause a significant market change, even if the independent factors are not newsworthy. News functions as an initiator of a chain of events that changes the public opinion about the market.

 

NEWS AS THE PRECIPITATOR OF ATTENTION CASCADES

Facts can attain newfound prominence in the wake of breaking news flashes. Sequences of attention are called cascades. Market reaction to news shows how media attention leads many investors to eventually take seriously news that would normally be considered irrelevant.

 

NEWS DURING THE CRASH OF 1929

The role of the news media in causing the market crash of 1929 has been a controversial subject. On October 28, 1929 the Dow Jones fell 12.8%, recording its biggest single day drop. The second biggest market crash in history (until 1987) occurred the following day, when the Dow Jones fell by 11.7%, totalling a 23.1% fall in just two days. On reading the major newspapers over the weekend, one could easily come to the conclusion that there was no significant fundamental shift. This fall can be seen as a negative bubble operating through feedback effects of price changes and an attention cascade.

 

NEWS DURING THE CRASH OF 1987

The stock market crash on October 19, 1987 set a new record one-day decline (22.6%). The crash had considerably to do with a psychological feedback loop amid the investors. It was set off by a surprisingly high merchandise trade deficit and proposed tax legislation. The introduction of "portfolio insurance" made many investors more reactive to past price changes. It was the changed nature of the feedback loop that was responsible for the crash.

 

THE ROLE OF NEWS MEDIA IN PROPAGATING SPECULATIVE BUBBLES

The media actively shapes public attention and creates the environment within which the stock market events are played out. The media can foster strong feedback from past price changes and hence affect current and future price changes.

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