Do financial journalists help inflate bubbles and then exacerbate downturns?
The traditional view is that journalists are messengers. They merely try to inform readers about how companies, economies and markets are doing.
However, a growing band of critics now say that journalists can actively aggravate business cycles, through their commentary, their choice of what news to play up and the experts they cite. This is part of a broader attempt to understand the role psychology plays in dramatic shifts in economic fortunes. Harvard University historian Niall Ferguson writes in The Ascent of Money, his history of finance, “Booms and busts are products, at root, of our emotional volatility.”
Do financial newspapers and television channels calm or fan such emotional volatility?
Here are two examples.
Last month in Mumbai, I attended a talk by Suresh Tendulkar, who heads the Prime Minister’s economic advisory council (EAC). The main thrust of his speech was an attempt to defend the council’s optimistic forecast for economic growth during the current fiscal year. EAC expects the Indian economy to grow at 7.1% in 2008-09, far more than private sector and multilateral forecasters anticipate.
Tendulkar repeatedly said that the Indian economy is not in as bad a state as the media made it out to be. He used the example of the recent front-page stories of job losses, reminding his audience that India’s total labour force is around 400 million and the estimates of current job losses have to be seen against this reality.
He then, in his own mild way, suggested that the media was spreading irrational pessimism. This is a complaint I have had to hear from various companies as well. One friend who works in the retail industry messaged me recently. He asked whether the way the financial media is playing up stories of job losses and wage cuts will wreck consumer confidence—and thus make the downturn worse.
The second example is from the US. Jon Stewart of The Daily Show, a satirical television programme, skewered loudmouthed CNBC anchor Jim Cramer for talking up stocks and ruining investors. Cramer’s most notorious call was to ask investors to buy Bear Stearns share just days before the investment bank tumbled into bankruptcy. “If only I had followed CNBC’s advice, I’d have a million dollars today. Provided I had started with $100 million,” quipped Stewart.
There is little doubt in my mind that financial journalists have to introspect about the role they played in inflating the bubble that has now popped. This process should include attempts to ask why they rarely questioned companies about their growing debt, quoted stock market experts who often do not give truly dispassionate advice, and sharply criticized every move by regulators at the Reserve Bank of India and the Securities and Exchange Board of India to cool down an overheated economy.
But all this still begs the question: Why do investors and consumers take blind decisions based on what they read or hear?
The link between the irrational behaviour of crowds and the irrational behaviour of financial markets is an old one. Charles Kindleberger cites one example in Manias, Panics and Crashes, his classic study of bubbles and their aftermath. This example deals with the South Sea Bubble of the early 18th century, when there was huge speculation in the shares of the South Sea Company that traded with South America. A banker bought £500 of South Sea stock in the third subscription list of August 1720. “When the rest of the world are mad, we must imitate them in some measure,” he said.
This is an old example of what economist Robert Shiller has described as attention cascades: People will believe something—that Share A will keep rising or the Currency B will keep falling —only because other people believe it. The belief keeps multiplying like a cascade.
Linked to this is what behavioural economists term confirmation bias. It is the tendency of human beings to search for or interpret information in a way that confirms their previous beliefs or prejudices. The media does have a role to play in encouraging attention cascades and confirmation biases of their audiences. But the final fault lies with the audience itself.
This is not a problem that can necessarily be solved with regulation or tougher measures such as forcing newspapers to blank out bad news during an economic crisis (as Russia has indirectly tried). The fault lies partly in journalistic practices and partly in the way human beings are hard-wired.
The way out is two stages of scepticism. First, journalists have to be sceptical about what they are told by companies and analysts. Two, readers and viewers have to treat what they read and hear from journalists with their own filter of scepticism.
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