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The Media: All Frenzy All the Time?

| | Posted in: Animal Spirits

In his July 2003 draft paper “Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media”, Thomas Schuster explores the role of the media in feeding investor irrationality. He concludes that:

  • Many novice investors obtain their “basic training” from the media.
  • The selective awareness and attention of the media, and their presentation of ostensibly logical explanations for random price fluctuations, provide positive feedback for noise trader trend following. The result incentivizes informed traders to participate in a reliable trend process.
  • “[The media] thus constitute a possibly destabilizing element, since they support the continuation and reinforcement of states of disequilibrium, or maybe even trigger them.”

To trade, or not to trade (on meta-information). That is the question.

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