Investment Quarterly > Fourth Quarter 2011

Our thirst for news

How information overload can negatively influence decisions

In today’s information age we often rely on the news to keep us informed about developments that affect our investment portfolios. However, that reliance may be skewing our investment strategies–often with negative consequences.

Studies show that investors are influenced by the media. We react not just to reported facts, but to the speed, volume, and preponderance of information available. What’s more, because of the proliferation of available information, the weight and volume of that information can become unbalanced–feeding us more negative than positive news. And as behavioural scientists have discovered, it’s human nature to focus more on the negative than the positive. Unfortunately, this can lead to investment decisions that are rooted in pessimism and panic, rather than reality.

“…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,” says noted Yale economics professor Robert Shiller in his book, Irrational Exuberance. Shiller notes that “in media-defined watershed periods”, many people look to the media as their advisor of last resort. He warns that “the media's power to shape public attention” should not be underestimated.

A number of U.S studies show that investors are definitely swayed by media coverage. This is particularly the case during times of economic or financial market downturns.

Pew Research Center’s Project for Excellence in Journalism studied media coverage related to the economic downturn of 2008 and the recovery which started in March 2009, analyzing close to 10,000 stories from television, radio, cable, newspapers and the Internet.

“One inescapable finding about coverage of the economy is the degree to which it began to subside when the sense of worry began to ease slightly,” notes the Washington D.C. based center. After accounting for 46% of overall news coverage in February and March (2009), coverage of the economic crisis dropped by more than half from April through June (2009). It fell even further in July and August.” As the study says, “good news equals less news.”

Pew also discovered a correlation between stock market behaviour and news coverage. “One dramatic example occurred in early April. As the Dow moved over the 8,000 mark, coverage of the economy from April 6-12 plunged to 17%, down almost two-thirds from the previous week.…As the markets moved up, coverage of the financial crisis began to slow.”

Other research reinforces the link between investor sentiment and news coverage in worrisome times. A 2011 study, Sentiment During Recessions, by Diego Garcia of the University of North Carolina discovered that the link between media content (based on financial coverage by the New York Times over 100 years ending in 2005) and the Dow Jones Industrial Average is concentrated in times of hardship, especially during recessions.

Yet another study, Giving Content to Investor Sentiment: The Role of Media in the Stock Market by Paul C. Tetlock measured the interaction between the media and the stock market based on daily content from the Wall Street Journal column, Abreast of the Market.

Tetlock discovered that “high levels of media pessimism robustly predict downward pressure on market prices.” He also notes that “unusually high or low values of media pessimism forecast high market trading volume.” And finally, “low market returns lead to high media pessimism.” Tetlock concludes that “measures of media content serve as a proxy for investor sentiment.”

So how does the individual investor avoid making potentially detrimental financial decisions based on patterns of news coverage–particularly when that coverage is focused on negative events?

It’s critical to be aware of your own biases and opinions, and to try to read with some balance, objectivity and awareness when weighing information or trying to make a decision. Try to pay less attention to the short-term “noise” and more attention to your long-term goals. That is, focus more on where you want to go and how you’re going to get there, than the market point moves for the day.

Staying true to your goals, and remaining committed and disciplined are what will help lay the groundwork for solid long-term portfolio performance. Investors who make hasty changes to asset mix in response to short-term conditions and news reports will likely do far more long-term damage to portfolios than the temporary problems caused by market or economic downturns. Jumping in and out of funds, and trying to time entry and exit points, usually at precisely the wrong times, can defeat the purpose of mutual fund investing.