Stories’ hype shouldn’t drive investment moves
The return of volatility in the first quarter of the year was the focus of one of my recent columns. Some interesting pushback followed the premise that prices sometimes seem to ignore news — and at other times hang on every headline.
My explanation: Most people have this correlation backward. Contrary to widespread belief, the news does not drive markets or prices; rather, it is the markets that drive news.
My favorite example was during the early weeks of the war in Iraq. A headline one morning proclaimed, “Historic Mosque Bombing Sends Stocks Lower and Oil Spikes Higher.”
That is the classic narrative explanation, that this event caused that reaction. But it is often misleading, given how random day-to-day prices can be and how quickly they can reverse themselves. Indeed, by the end of that day, stock prices had recovered to turn positive, and the oil price spike ended as quickly as it started. The article headline was changed to “Despite Historic Mosque Bombing, Stock Prices Recover and Oil Stabilizes.” The facts changed, but the basic narrative remained the same.
In the print-only era, the daily headlines were less easily shown to be so wrong. The 24/7 internet era reveals more of these narrative errors.
The media have gotten better at using the word “as” instead of phrases like “because” or “due to.” If that same news story occurred today, it might have carried a headline like “Stocks Fall, Oil Rises as Historic Mosque Bombed.” It is a recognition of a correlation without the implied narrative-driven causation.
Genuine news can drive prices — previously unknown scandals, takeovers, and earnings misses are the stuff that can move stocks and markets. This is information that isn’t already reflected in prices. However, such events tend to be relatively rare. Most media coverage reflects the normal human bias to tell memorable narrative stories rather than rely on dry and easily forgettable data.
Consider the evidence for this:
■ Narratives: Columns and articles all use the traditional tools of literature. There are well-developed characters, often in conflict with one another, with overtones of good and evil. The story arc builds to a climax, with winners and losers. The narrative tale often is compelling and even entertaining. This means the article mentioned above is less about a fully contextualized and accurate analysis and more about good storytelling.
■ Threat awareness: Evolution has primed your brain to identify possible threats to your survival. It is fair to note a manifestation of this in our collective focus on bad events versus the signs of progress or even good news. Danger is an existential risk, potentially reducing your ability to pass your genes along. Good news does not provide a competitive procreative benefit.
■ Disproportionate coverage: The media can create a distorted view of the world. For example, U.S. news outlets tend to overemphasize domestic events while underrepresenting overseas coverage. This creates and reinforces a worldview that is at odds with reality.
The tendency to think in terms of unproductive, money-losing narratives is ever-present. Humans simply love a good story, even if it is at odds with observable facts.
Narratives create memorable and interesting stories, but they don’t create an especially accurate picture of the world. Investors should be aware of this.