The Media and Financial Markets

The Media and Financial Markets

Joseph Darby

Why ignoring mainstream media is good for your investments

The media and journalists will inevitably make mistakes, especially when it comes to complex issues. At the end of the day, people make errors, and media outlets are staffed by people.

However, these mistakes or misleading information can have real consequences, especially when you use the media’s opinion to inform your financial decisions. The best recent example of this was the hysteria around NZ house prices during the first lockdown of 2020. At the start of the Covid-19 pandemic, the expectation was that house prices could fall by 10 – 20 percent. This type of fall was forecast by many big banks and The Reserve Bank of New Zealand (RBNZ) who forecast a 9 percent drop in 2020.

The reality was that NZ house prices increased by 25.2 percent from July 2020 – July 2021 and many would argue that this is at least partly the result of the RBNZ’s policy settings, including the removal of loan-to-value ratios, which resulted in increased lending and subsequent house price growth. Interestingly, the RBNZ is now forecasting house prices to drop between 2022 and 2024. Only time will prove if their latest prediction is correct.

Perhaps it is unfair to bag on the media with house prices, as they were mainly repeating what leading economists, big banks and the RBNZ were saying. The RBNZ even recently admitted that their predictions on house prices have been off by an average of 5.2 percent since 2010. So, if the RBNZ can’t get it right, then what hope do the media have?

The media’s role in financial markets

The media influences so many people’s behaviour nowadays. Information can spread after a click of a button, whether it is true, false, speculation or gossip.

The media’s basic role is the analysis and dissemination of information and in this respect, the media has importance in financial markets. For markets to operate efficiently, investors need to make informed decisions. However, the way information is shaped and delivered to investors can lead to completely different financial outcomes. In this sense, there are two main mechanisms that can influence the way in which investors retrieve and process financial information: on the one hand, information intermediaries (websites, newspapers, TVs, radio, and others) select and convey to investors only the part of the information they believe to be relevant; on the other hand, the way in which each individual can differently interpret the same piece of information depends on the individual’s beliefs and the possible presence of personal cognitive biases.

The relationship between media, information and financial markets is therefore overly complicated. First, the information that reaches investors has been already selected and potentially slanted by the media, twisting the individual’s attention towards a limited number of topics. Second, once the investor has been exposed to a piece of given information, the interpretation is highly influenced by the way each investor processes it.

Investors need to remember that the media is a business. A business where the goal is to capture your attention for the longest amount of time to expose you to advertising. Like any successful business, the media has an integral understanding of its product, you! (To clarify, your attention is the ‘product’ that is ‘sold’ to organisations and companies who want to put advertising in front of you).

Negative news sells

It is well known that people tend to have a negativity bias. Negativity bias is the notion that topics of a more negative nature tend to have a greater effect on our psychological state than neutral or positive things.

According to psychologist Rick Hanson, a negativity bias has been built into our brains based on millions of years of evolution when it comes to dealing with threats. Our ancestors lived in difficult environments. They had to gather food while avoiding deadly obstacles. Noticing, reacting to, and remembering predators and natural hazards (negative) became more important than finding food (positive). Those who avoided the negative situations passed on their genes.

Journalists and the mainstream media know this, and therefore they are incentivised to run negative stories over positive ones because negativity is what captures our attention. Mainstream media even have a saying about it: “If it bleeds it leads”. Need proof? Simply turn on the TV news or scroll through a media outlet feed and you will see that most stories are negative.

What does this mean for investors?

Investors should be mindful of negativity bias and the effect it can have on our investment’s decisions, in many cases which makes people scared to invest.

When it comes to investing, there is often a disconnect between the media and financial markets. The media will often preach the doom and gloom of the current day, whereas financial markets are forward looking and continually ‘price in’ factors that might occur in the future. For example, despite NZ’s latest lockdown, the NZX50 (a measure of performance comprising the 50 biggest companies in NZ) grew by just over four percent during August 2021. To some, this might make no sense. Why would the markets think that NZ’s 50 biggest companies are more valuable, during a lockdown that has affected all businesses? This is because markets are forward-looking and often look past the here and now, considering long-term growth prospects of companies and investment opportunities.

So, how do investors process information correctly and avoid biases to build long-term wealth? We suggest picking a strategy that is suitable for what you want to achieve and stick with it. Where investors often come unstuck is making emotional changes to their portfolio, based on the terrible news of the day. It is important to remember that what is happening in today’s media is usually irrelevant when considering what will happen in 10 years. So, if you are investing for 10 years or longer, why would you worry about the weekly ups and downs of financial markets or the news stories that cause them.

Bottom line – for investors we suggest ‘blocking out the noise’. Focus on your long-term objectives, develop a strategy you think will get you there, and stick with it.

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