Stories Don’t Necessarily Reflect Reality

In to a recent Bloomberg article, columnist Barry Ritholtz writes,  “Contrary to widespread belief, the news does not drive markets or prices; rather, it is the markets that drive news.”

Citing several examples, Ritholtz explains that while “genuine news can drive prices—previously unknown scandals, takeovers, and earnings misses are the stuff that can move stocks and markets.” However, he adds, such events tend to be rare.

“Most media coverage,” writes Ritholtz, “reflects the normal human bias to tell memorable narrative stories rather than rely on dry and easily forgettable data.” He supports his argument through three key points:

  • Narratives—”Columns and articles,” he asserts, “use the traditional tools of literature,” to present stories that are “compelling and even entertaining.” But this doesn’t necessarily correlate with accurate analysis.
  • Threat awareness—”Evolution,” says Ritholtz, “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.”
  • Disproportionate coverage—”The news media can create a distorted view of the world,” according to Ritholtz, adding that U.S. news outlets tend to focus more on domestic than global events. This, he argues, “creates and reinforces a worldview that is simply at odds with reality.”

Ritholtz concludes: “Narratives create memorable and interesting stories, but they don’t create an especially accurate picture of the world. Investors should be aware of this.”