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Financial Info & You

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Even if you outsource part of the decision-making process to others, learn to process financial information on your own and avoid the mentality of crowds that pervades financial markets.

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The pressure's on the screen
To sell you things that you don't need
It's too much information for me
--Duran Duran

An astonishing volume of financial media streams toward today's market participants. Some folks completely trust this media. Others delegate the information assimilation process to others. Whether you play an active role or not, it is you who must ultimately live with the consequences of the info gathering approach that you choose.

Effective market participants take charge of the information assimilation processes related to their financial well-being.

Sources of Financial Information

Making sense of financial markets requires considerable information. Largely due to the advent on online technology, growth in the quantity of financial market information has exploded. Consumers of financial information have many media choices. Financial media sources can be lumped into various groups such as:

(1)
Traditional news sources: Newspapers, magazines, television shows, websites, and network combinations thereof that transmit financial news and other information to a broad audience.

(2)
Companies: They supply financial info via news releases, financial statements, and other means.

(3)
Brokerage houses and other Wall Street firms: The 'sell side' of Wall Street employs an army of researchers and public relations personnel that pump market information to their customers and prospective customers (that's one of the reasons they're called the 'sell side').

(4)
Newsletter and subscriber only websites: Individuals pay a premium for access to 'closely held' information and analysis.

(5)
Government sources: This may not seem like media to you, but the government transmits extremely large amounts of financial information on a routine basis to the populace, including econometric data (GDP, employment, inflation, etc.) as well as info on fiscal and monetary policy. To the extent that geopolitical and other 'outside' issues matter to the market (and they do), the influence of government-related media is far reaching.

Trust Issues

While the massive quantity of information flowing from today's financial media sources can serve to empower market participants to make better financial decisions, it can increase vulnerability as well (Bradley, 2004). Minyanville founder Todd Harrison notes some general concerns:

"I often opine that 'people are so thirsty, in the absence of water, they'll drink the sand.' And when I walk along the beach that is mainstream financial programming, I can't help but cringe when watching content focused on ratings rather than what's right. Fiscal literacy isn't a function of a lightning round, firing off 'buys' and 'sells' at a breakneck pace with no regard for time horizon and risk appetite. It's about understanding the mechanism, assimilating the metrics and 'seeing' both sides of every trade. Until you understand the game, I'll offer, you're at a disadvantage when stepping on the field. That, quite simply, was the genesis for Hoofy and Boo. I've long believed that bull and bear markets coexist and the residual grist is what garners front page headlines. By assigning these critters as metaphorical representations of each dynamic, I found that we could delineate the positives and negatives and pair off their perspectives. They certainly won't always be right but the ability to learn from our mistakes is what morphs them to lessons..."

Causes for Concern

There are a number of reasons why users should carefully process information obtained from financial media.

Lack of market understanding or poor reporting process: Making sense of complex social phenomena like financial markets requires deep seated intelligence developed over considerable time periods (Leonard & Swap, 2005). It is likely that some individuals who report financial news may not possess the knowledge essential for accurately explaining what is going on in markets (here, here, here). In other cases, reporters simply may not do their homework.

Sales , profits, and stock price: 'Sell side' firms such as brokerage houses tend to profit more when markets are rising and when asset prices are high. It can be in these firms' best interests to position research and other information in an optimistic manner (Carleton, Chen, & Steiner, 1998). The same principle holds true for traditional news sources. For example, financial television shows tend to attract more viewers in rising markets. It may therefore be in a media outlet's best interest to ignore negative perspectives and to bias news in a way that attracts a bigger audience. Of course, it is possible that companies can bias their news flow as well (Healy & Palepu, 2001).

Client privilege: Wall Street firms collect billions of dollars of investment banking related fees from corporations. Although recent regulations limit information that firms can publish on their investment banking clients, it is still possible for financial firms to spin publicly transmitted information in a manner that is in the best interests of their clients (Dreman, 2003).

Herd behavior: Analysts tend to be optimistic in their assessments of economic and corporate prospects, and under-reactive to information that suggests otherwise (Easterwood & Nutt, 1999). As such, analyst research tends to follow the news, and often motivates analysts to change their recommendations after prices have reflected the headlines (Jegadeesh et al., 2004). Indeed, when mainstream media begin to promote a 'trend' in earnest, evidence (such as the 'cover story' phenomenon) suggests that the 'trend' is nearly over.

To instill or maintain confidence in the economic system: Modern economic systems depend on confidence of market participants. For example, if consumers perceive difficult economic times ahead, they may spend less and save more. Government officials understand this, and often engage in communication campaigns that emphasize optimism. Economic etrics reported by the government can also influence psychology. As such, economic information originating from government sources can be subject to manipulation by bureaucrats seeking to influence popular thought (Rothbard, 1962). It is therefore useful to cast a critical eye when interpreting government-sponsored economic measures such as the consumer price index.

Your Responsibility

So, does this imply that all information flowing from mainstream media sources is bad? Not at all. Effective market participants often require information from many publicly available sources (Schwager, 1989).

However, the sheer volume of available financial information can be intimidating, thereby prompting undesirable behavioral responses. When faced with intimidating or overwhelming situations, individuals often constrict information gathering activities and detach themselves from the process (Staw, Sandelands, & Dutton, 1981). As a consequence, many financial market participants outsource decision-making capacity to others.

Recognize, however, that whether you make your financial decisions by yourself or delegate them to someone else, you will bear the primary consequences of these decisions. Even if you outsource part of the decision-making process to others, learn to process financial information on your own and avoid the mentality of crowds that pervades financial markets. Perhaps even unplug yourself from some media channels to reduce the 'noise.'

After all, at the end of the day, only you can protect your money.

References

Bradley, C. (2004). Online financial information: Law and technological change. Law & Policy, 26: 375-409.

Carleton, W.T., Chen, C.R. & Steiner, T.L. (1998). Optimisim biases between brokerage and non-brokerage firms' equity recommendations: Agency costs in the investment industry. Financial Management, 27: 17-30.

Dreman, D. (2002). Analysts' conflicts-of-interest: Some behavioral aspects. Journal of Psychology & Financial Markets, 3(3): 138-140.

Easterwood, J.C. & Nutt, S.R. (1999). Inefficiency in analyst's earnings forecasts: Systematic misreaction or systematic optimism? Journal of Finance, 54: 1777-1797.

Healy, P.M. & Palepu, K.G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting & Economics, 31: 405-440.

Jegadeesh, N., Kim, J., Krische, S.D. & Lee, C.M.C. (2004). Analyzing the analysts: When do recommendations add value? Journal of Finance, 59: 1083-1124.

Leonard, D. & Swap, W. (2005). Deep smarts: How to cultivate and transfer enduring business wisdom. Boston: Harvard Business School Press.

Rothbard, M.N. (1962). Man, economy, & state. Princeton, NJ: D. Van Nostrand Co.

Schwager, J.D. (1989). Market wizards. New York: Harper Collins.

Staw, B.M., Sandelands, W.E. & Dutton, J.E. (1981). Threat-rigidity effects in organizational behavior: A multilevel analysis. Administrative Science Quarterly, 26: 501-524.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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