The news can make our glasses feel half full (or empty)

Dow Jones & Company Inc.

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Dow Jones has discovered something rather nifty: you can recycle yesterday’s news to tell us about shifts in the economy. It’s nice to know that old pixels have value. I’ve written a lengthy story about if for The Big Money, but I want to share with True/Slant some of the details and what makes it interesting to me — the intersection of news and behavior. Can what we write influence the way people act?

First, a brief summary of the Economic Sentiment Index, which scans a set of 15 newspapers from cover to cover to establish the tone of the news — are we feeling good about the economy or not? DJ ranks the sentiment from 0 to 100 and gives it a number. The higher the number, the better we’re feeling. After back-testing the search algorithm to 1990, DJ has declared the indicator ready for prime time. The April number released Thursday was 27.6 — up from the November low of 22.2, but still scraping the bottom. What’s noteworthy is that the ESI, known internally as the Optimism Index, seems to have bottomed before the more established surveys — Consumer Confidence and Consumer Sentiment.

Why does it work?

Here’s what Robert Shiller, author of Irrational Exuberance, has to say: “Although the news media – newspapers, magazines, and broadcast media, along with their new outlets on the Internet – present themselves as detached observers of market events, they are themselves an integral part of these events.” But the media are not prime movers in the market – and by extension I would add the economy – but amplifiers. The media operate in a way that creates a feedback loop – a self-fulfilling prophecy. And the media create a communal reality that may be very different from the private lives of news consumers. That communal reality can act on the way readers behave in both marginal and critical ways.

Take the coverage of the recession. If I write recession, how many readers at this moment automatically think to themselves on some level: “The worst since the Great Depression”? The power of that phrase – the Great Depression – prompts everyone to look over their shoulders, even people who haven’t been hurt — “the worried well.”

The recession meme as crafted in the press – worst since the Great Depression – conjures an image like a hurricane indiscriminately washing over the entire country. But in fact it may really be a demon twister that flattened vast areas of the country – Detroit, California, Southern Florida – but left many other areas barely touched. As a nation, though, we are all battening the hatches and wearing our rain boots.

Best-selling author Dan Ariely confides to me that he and his wife felt as if they needed to make amends for taking a vacation last October when the economic storm was cresting. They have been fortunate during this crisis to remain largely unscathed (well, if they don’t look at their retirement account statements). They hesitated to publicize the difference between their private reality and the shared national story, even to friends who were equally well off. Many other people I know aren’t buying clothes or going out to eat because they are feeling uneasy — although that may be shifting a bit now.

In my story for The Big Money I also note that the media were an unnamed player in the Bank of America drama at the end of last year. The feds reportedly squashed any attempts by BoA to undo its purchase of Merrill Lynch because it feared for the consequences. In other words, the feds feared that if the news outlets began writing about just how awful things were at Merrill, there could have been a run on the financial system. I think the feds were wrong — but the concerns are clear.

Shiller summarizes the power of the press this way in his book: “The history of speculative bubbles begins roughly with the advent of newspapers.”

It’s something to think about.

2 thoughts on “The news can make our glasses feel half full (or empty)

  1. “Many other people I know aren’t buying clothes or going out to eat because they are feeling uneasy”

    Hasn’t this pretty much always been that fact, confidence has long played leading role in our economic health.

    “But the media are not prime movers in the market – and by extension I would add the economy – but amplifiers”

    I think that’s a nice way of letting the members of the finical fourth estate off the hook. From where I sit the role of the media for the past 20 years has been as cheerleader of whatever bubble is coming down the pike. Sometimes to me it seems you treat the economy like an iceberg but only report on the portion above the water line.

    The fact that stories like Enron, AIG, Madoff come as such surprise makes one wonder what the hell is exactly going on. It would be good for the industry if people who cover fiances started seeing themselves as investigative reporters and not motivational speakers.

    • Brian, Agreed the press tends to amplify rather than take a critical look at trends. But at the same time I think it’s too easy to blame the press for outcomes. I’ve been digging into some academic studies about the relationship between news reporting and prices in the market — which are objectively easier to measure than other kinds of things like confidence and behavior. I was pretty surprised to learn that the effect of reporting on stock price movement is surprisingly fleet. For example, during the Internet bubble of the early 90s one study showed that media coverage accounted for only 2% of the run-up. The study was conducted over 2 1/2 years and the economists were pretty surprised by the results. One of the economists involved in the study told me that the study didn’t explain the dynamics behind the bubble. But he suspects professional traders were prime movers. Positive or negative news on IPOs affected prices for only two days. Pretty surprising.

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