Two Causes of the Media's Cognitive Distortions of the Market

I was listening to CNBC, and they just reported that the sky is falling. Oh my God!! Look out below.

The Financial Media is deepening and prolonging the recession by engaging in a series of what a professional would call cognitive distortions. The first of these is called Catastrophizing. This is defined as believing that a situation is much worse than it really is. Here's an example of Catastrophizing. A large bank reports a huge loss due to aמ unrealized loss in its securities portfolio, and deteriorating loan asset quality leading to higher charge offs and loan loss reserves. Then a talking head, or one of the anchors on CNBC, says something like this:

"The entire banking system is insolvent."

Well actually, no it's not. There are thousands of banks in this country and just because Citigroup (C) thought they could "ride the worm," if I may be allowed to quote from Dune, doesn't mean that every other banker did.

This Catastrophizing is closely related to Magnification, or the tendency to put a stronger emphasis on negative events and ignoring the positive events.

So what are the causes of these cognitive distortions? There are many possibilities:

1) The media is so immersed in the flow of information and the negative effect of the markets that all they can see are the problems. This "wall of bad news" leads to the distortions listed above. The media was guilty of this in reverse when the markets were heading up. Can anyone remember an anchor actually challenging the Energy Bulls with tough questions two years ago, or were you as annoyed as I was that they were treated as god-like investors incapable of error?

2) They are easily manipulated by large institutional investors who have their own agendas to advocate. Have you considered that the commentators who are pushing Nationalization are short the banks, and their souls are not as pure as they seem?

Comments

[Jim Hawthorne:]

We are in a crisis. The media is guilty 'Catastrophizing' and 'Magnification'. When we are in bubbles, the media jumps on the Eurphoria bandwagon, pumping away with orgiastic ecstasy while dousing the slightest cautionary prophet with disdain and ridicule. The media is the media.

It is always 'late to the party' and seeks safety in the popular trend by looking backwards.

Stop complaining about this fact of life and start using the media as the excellent contrarian indicator it has become!

Feb 25 04:45 AM

[Noleen:]

I agree with you 100%. It's the media's job to excite the public. Remember this, the MEDIA tells you what THEY want you to know. But what the media is doing may lead to more and more tragedy.

Feb 25 05:43 AM

[atlasman:]

I agree as long as the Obama machine counts as one of your Institutional Investors.

Feb 25 07:25 AM

[kelm:]

Your first mistake is listening to CNBC. Seriously, long ago I walked away from listening to TV reports on the markets because I realized that the emotion of the reporter was distorting the message. I also avoid popular financial publications and websites.

If you want "data" and analysis that you can trust read the Financial Times and/or the economist (and then wonder how all these people didn't see the crisis coming as the FT writers have been casting a light on the credit market time bomb problems for years).

I find Bloomberg the best for daily news updates but even there one can see the stock "dollar rose on flight to quality" know-nothing narratives.

As for the media making it worse - this is a global crisis and thanks to America exporting the Hollywood tripe that we do so well you can go to Asia, India, etc and see daily market commentary every bit as sensational as what you see here.

Having said that we are in the worse crisis since the depression and as Volker said last week, trade and economies are contracting FASTER than during the 1930's. The media may effect t on the margins but fundamentally we are in deep the brown stuff.

Feb 25 10:13 AM

[mastic trac...:]

it's too easy to blame the media, that way we do not have to perform proper analysis. the media is a fact of life, their job is to create viewership and in turn sell ad time or die. we all either have to accept their existence and choose to use them advantageously or allow them to irritate, the former will create fewer prozac moments.

Feb 25 10:14 AM

[Eric Fox:]

I wasn't complaining about it, I just wanted to see if any else thought the same as me. I also wasn't blaming them for the recession, just that they seem to make it worse and therefore extend its length.

Feb 25 10:27 AM

[OldLimey:]

kelm: "If you want "data" and analysis that you can trust read the Financial Times and/or the economist (and then wonder how all these people didn't see the crisis coming as the FT writers have been casting a light on the credit market time bomb problems for years)."

Maybe the FT's US edition is materially different from the 'original' we get here in the UK, but I gave it up some time ago as an increasingly Keynesian, New Labour rag. Worse, it's weekend edition is an unalloyed distribution channel for asset gatherers and the property sector. It's OK for (yesterday's) stats and has some OK op ed stuff, but the editorial staff have imho utterly trashed a fine brand.

Feb 25 02:26 PM

[Jim Hawthorne:]

I agree with your sentiments about the distortions and outright mis-information cranked out by CNBC and others.

However, I do pay attention to them for the simple reason that unfortunately at this point they still have to power to move markets and do so regularly. Unfortunately, they do have a very large following.

For example, good coin has been banked by taking Jimmy C's rec's, waiting a couple of days for the pop to taper off, and then shorting them vigorously!

On Feb 25 10:13 AM kelm wrote:

> Your first mistake is listening to CNBC. Seriously, long ago I walked
> away from listening to TV reports on the markets because I realized
> that the emotion of the reporter was distorting the message. I also
> avoid popular financial publications and websites.
>
> If you want "data" and analysis that you can trust read the Financial
> Times and/or the economist (and then wonder how all these people
> didn't see the crisis coming as the FT writers have been casting
> a light on the credit market time bomb problems for years).
>
> I find Bloomberg the best for daily news updates but even there one
> can see the stock "dollar rose on flight to quality" know-nothing
> narratives.
>
> As for the media making it worse - this is a global crisis and thanks
> to America exporting the Hollywood tripe that we do so well you can
> go to Asia, India, etc and see daily market commentary every bit
> as sensational as what you see here.
>
> Having said that we are in the worse crisis since the depression
> and as Volker said last week, trade and economies are contracting
> FASTER than during the 1930's. The media may effect t on the margins
> but fundamentally we are in deep the brown stuff.

Feb 25 05:41 PM