Monday, November 23, 2009

The News Driven Economy

In recent months the economic situation has gotten decidedly better. Volatility in the market - as measured by the VIX index for example - has decreased considerably, nevertheless the economic headlines are still screaming at full blast. It's as if the news outlets are run by vocal manic-depressives. One day the recovery winds are blowing strong, the next day hopes are dashed and everyone is supposedly heading for the hills.

The best examples of manic-depressive economic news reporting can be seen on days when the stock market starts low and ends high, or vice-versa. I typically check the CNNMoney website a couple of time throughout the day, and often find that the very same news is interpreted in opposite directions depending on which way the stock market is heading at that very moment. The lack of consistency as the headline is changed but the story itself includes only minor corrections is amusing.

These days I am reading The Black Swan, by Nassim Taleb. A thought provoking and interesting read, even if it's written in a somewhat self important and needlessly complex way. It looks like I am not the only one who is bothered by these inconsistencies in the economic reporting. Taleb has been tracking them for years. In his book he gives the following example from reporting by Bloomberg news, relating to the capture of Saddam Hussein in 2003:

"US Treasuries rise; Hussein capture may not curb terrorism"

Followed 30 minutes later by:

"U.S. Treasuries fall; Hussein capture boosts allure of risky assets"

The same fact interpreted in exactly the opposite way, depending on the movement of the markets (in this case treasury prices).

Taleb ascribes these inconsistencies to the fact that people demand an explanation or narrative to facts, and to the news outlets' wanting to deliver what their customers want, even if they don't actually have anything to deliver. That's probably true, but I think that no less of an explanation is the fact that drama and crisis increase viewership & circulation. How many people would tune in to hear that just another random day went by?

Be that as it may, this rampant inconsistency and tendency towards drama makes financial news a particularly poor source on which to base economic and investment decisions, and it's not limited only to electronic media, these tendencies pervade printed financial media as well. The media tends to report that things are really awesome when they are merely OK, and tends to report catastrophes and when reality calls for some mild showers. That also happens to be true for Weather Channel reporting, but that's a topic for another day...

This is yet another reason, if you needed it, to have your own well thought-out economic and financial plan, and to stick to it.

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Kim Stiens said...

I think this is an interesting problem without an immediate solution. We want news to be motivated by truth and, if we're feeling adventurous, justice. But, in reality, its motivated by profit. Thus, they print whatever will draw the readership, as you said. But how do you remove profit from the equation? How do you make people want different things from their news? So far, education hasn't helped much... I like to think of public media being the alternative, but you always have the potential issues of bias due to either government or private contribution... I just don't know!

Shadox said...

Not pretending I have an answer for that one, and I don't expect that news reporting will change any time soon (or ever), but my point is that if the "news" is going to be crappy, you need to protect yourself and not fall prey to its traps and sensationalist reporting.