Divergent Theories: Efficient Markets vs Behavioral Finance

August 1, 2011


Journalists acted as cheerleaders for buying stocks […] The market values journalists advice more then of analysts, and journalists advice are believed to contain more new information compared to analysts advice […] The lesson for investors is this: If either journalists or analysts come with a “sell” recommendation the stock drops significantly right away and continues to yield abnormal negative return. If an analyst issues “buy’s” there is only a slight chance that the stock will show abnormal positive return and more likely that the return will be negative. But if journalists issue “buy’s” it offers investors a short time of positive and significant abnormal positive returns, before the returns disappear and become severely negative. This is what Lidén calls a classic overreaction. “…it is obvious that analysts and journalists were fooled by the over-optimism from the positive information, but they were not from negative information. In turn, this is due to positive information being more intricate to interpret.”
25(source 2005).”

“The British financial journalism had been molded in the hands of people like J.R. McCulloch the editor of the Scotsman and the first real economist to write regularly in a newspaper. The influence of McCulloch is evident as he edited such works as The Wealth of Nations by Adam Smith in The Works of David Ricardo (source). Today magazines like The Economist and The Financial Times rely on McCulloch’s heritage while the American Barron‘s and the Wall Street Journal have for long been more finance oriented sources based on Alsanger’s foundation. In general this could be described as Speculators vs. Economic theory. This difference is important when retrieving, analyzing and valuing information from different sources on both sides of the Atlantic Ocean. Different cultural background and general rivalry has for example led many US financial journalist still today to consider The Economist the most overrated journal in the world!
(source 2005).”

2005 “Publishers such as Pearson (Financial Times, Economist) and Dow Jones (WSJ) are striving to become journalistic brand names that integrate news content and media around the basic product which paper is. The environment of the 90s has been called paradoxical concerning these two publishing giants. On one hand they are forced to adopt multimedia strategies, particularly developing a range of non-print products. On the other hand they have to do so while maintaining a historical focus on financial news, with clear growth limitations when considered nationally (source 2005).”

2005-1995 This “decade has been described by some scholars as the decade of popular capitalism, materialized in the growth of the “citizen investor” and of the globalization – primarily corporate and financial (Arrese and Medina (2002). The success of electronic financial media has forced economic dailies to stop identifying with just the traditional newspaper.”

2005 An example of the opposite opinion would be how Michael Bloomberg the Governor of New York City starts up his day. Bloomberg is a former stockbroker and owns one of the worlds most powerful finance quotation and informational media bearing his name. Remarkably enough Mr. Bloomberg says he gathers information the old-fashioned way starting with printed media. Among these are The Wall Street Journal, The Financial Times and The New York Times but he seldom goes to a story inside. He reads The Economist from cover-to-cover, never misses Fortune and usually reads Business Week. As for TV news, “I never watch TV, even my own [news channel].”

2004 Rupert Murdoch, “president of the News Corporation which publishes newspapers such as The Times in the UK and The New York Post, has urged newspaper editors “to embrace the internet saying print news executives sat by and watched as a generation of digital consumers turned away from newspapers…The challenge for each of us in this room is to create an internet presence that is compelling enough that users make it their home page. Just as people traditionally started their day with coffee and a newspaper, in the future I hope that the way they start their day online will be with coffee and our website,” Murdoch said at the annual meeting of the American Society of Newspaper Editors last April. If quotes of closing price would have been accessible to investors in a similar way back in 17th century surely there would have been no need for papers like the Lloyd’s List.” (source 2005).”

1996 Dan “Dorfman was fired from his 450.000 dollars-a-year job in 1996 after he refused to turn over his confidential sources. Federal investigation was made whether he had personally profited from his reports, either by trading on them or tipping others in exchange for favors. In an investigation made by the WSJ it was found that Dorfman maintained a brokerage account that was managed by one of his frequent sources, a broker who later left the business after being acquitted of fraud charges (source 2005).”

1990s “Dan Dorfman worked as a financial journalist at the Money magazine and as a commentator for the CNBC in the early 90s to become the highest-paid and the most influential business reporter in his time. Dorfman’s expertise was tied to his linguistic skill – not his analytic skills. He was a reporter, not an analyst. Dorfman went on television and mentioned a stock that someone had told him that was a possible
takeover target. The stock moved up and although only briefly, everybody was happy – for a while [. . .] But that evolution seems to be part of the everyday life of the modern journalist. Investment bankers, arbitrageurs, corporate raiders, analysts and people in corporate public relations all try to spin the story to their favor. To analyze how this evolved into a serious problem is the case of one of the most influential US business journalist who “moved market” for years with exclusive stories, but then was found guilty in the court of public opinion for unethical behavior regarding his work (source 2005).”

1980s As the golden age of economic controversy came to pass in the 80s the turmoil left a deep mark on the financial press. Privatization, deregulation of the financial markets, advances in information technology along with increased private share ownership helped to unleash a powerful new figure in the financial media which had mostly been overlook for many decades – the financial analyst. The bull market of
the 80s and again in the late 90s led “the tipster” to become in greater demand then teachers and scholarly journalists. “Now, as in the 1920s, speculation is a game all the family can play for the price of an evening paper.” (source)

1973 The oil crisis in 1973 and the collapse of the Bretton Woods exchange system seriously dented the limelight of the Keynesian economic gurus and gave rise to antiKeynesians intellectuals such as the Nobel-winning Austrian economist Friedrich A. Hayek (source).

1960s and 1970s The standing of the American economic profession rose highest and the leading men of this period became celebrities and gurus (Galbraith, Samuelson and Friedman) and in demand as commentators. Some people hoped that the ideas of a new breed of economists would rid the world from economic and financial crises [. . .] A prime example of this is the successful selling of Milton Friedman’s “supply-side economics” in the Wall Street Journal and the “monetarism” in the Financial Times. Both journals experienced tremendous success at this time where the WSJ climbed to a top position in circulation, toppling such newspapers as the New York Times and the Washington Post. The basis for creating a solid specialized news groups in the 60s was supported by the lack of interest for economic and financial news of the general news media (source).”

The seeds of this craze were planted in 1593. A man by the name of Conrad Guestner imported the first tulip bulb into Holland from Constantinople, in present day Turkey. After a few years, tulip bulbs became a status symbol and a novelty for the rich and famous. Eventually, tulip bulbs became a hot
ticket item in neighboring Germany, as well. Initially, only the true connoisseurs bought tulip bulbs, but the rapidly rising price quickly attracted speculators looking to profit. By 1634, tulip mania had feverishly spread to the Dutch middle class. Pretty soon everybody was dealing in tulip bulbs, looking to make a quick fortune. The majority of the tulip bulb buyers had no intentions of even planting these bulbs! The name of the game was to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb! (Source: http://www.stock-market-crash.net; http://cepa.newschool.edu/het/profiles/mcculloch.htm)”

financial journalists,
stock recommendations,
contrarian signal
“dead tree media”

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