The media and market confidence

Not only are stories useful for selling investment ideas, they also play another role, as Shiller observes:

People also appear to want to construct simple reasons for their decisions, as if they feel the need to justify those decisions in simple terms – if not to others then to themselves. The need to have a simple reason to explain a decision is similar to the need to have a story behind a decision.

Powerful stories focus the attention of investors on information that can affect the confidence of individual investors and therefore eventually affect the sentiment of the market as a whole. In many cases, these stories involve illogical reasoning, known as the post-hoc-ergo-propter-hoc (Latin for “after this, therefore on account of this”) fallacy.

For example, we might read a news story attributing a 2-per-cent fall in the S&P ASX 200 due to concerns over slowing economic growth in China. Although the two events might be consecutive, we cannot simply assume that the one would not have occurred without the other. The fall in the S&P ASX 200 may have happened anyway. The two events might both be linked by a common factor that isn’t covered by the news story. While it seems likely that both events are related, we cannot be certain that it wasn’t merely a coincidence.

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