Deluge of info, but is anyone gaining?
Vivek Kaul Thursday, February 09, 2006 21:14 IST
MUMBAI: “Water, water everywhere, but not a drop to drink” goes an old English saying by Samuel Taylor Coleridge.
If one were to paraphrase it in the context of the amount of news being churned out by the business news channels these days, it would be “information, information everywhere, but no time to think”.
The business media in India has come a long way from getting the unabridged report of Reliance Industries Ltd within a few days of its printing meant an exclusive story to news anchors providing real-time information to investors and making a big hit when the Sensex crossed 10,000 for the first time.
So, the question to be asked is, is more information good? The general rule is more information is always better. Investors need to have enough information on companies they are investing in. But more information need not always be good.
Let’s take the case of US stockmarkets, and the stockmarket bubble in the late 90s. This bubble coincided with the explosion of business news channels. The most influential of them is CNBC. This channel provided non-stop coverage of what was happening in various stockmarkets through a ticker tape running at the bottom of the screen.
As James Surowiecki points out in his book, The Wisdom of Crowds, “The network was, in one sense, just a messenger, letting the market, you might say, talk to itself. But as CNBC’s popularity grew, so did its influence. Instead of simply commenting on the market, it began - unintentionally—to move them.
It wasn’t so much what was being said on CNBC that prompted investors to buy and sell, so much as it was the fact that it was being said on CNBC”.
Economists Jeffrey Busse and T Clifton Green carried out a research on how markets reacted to information provided in the ‘Morning Call’ and the ‘Midday Call’ segments on CNBC. These segments, which were broadcast when the market was open, gave analysts’ views on individual stocks. When the recommendation on a stock was positive, the price of the stock went up within the first 15 seconds of the programme. When the recommendation was negative, the information was incorporated into the stock price over a period of 15 minutes.
The point that clearly emerges here is that investors were not reacting to the content of the report. In 15 seconds, it’s not humanly possible to decide whether what was said in the report made sense. As Surowiecki points out, “All the investors, or speculators, cared about was that because CNBC said it somebody would be trading on it. Once you know that other people are going to react to the news, the only question becomes who can move fast enough”.
CNBC and other business channels bombarded investors with news. At any point of time, an investor knows what other are thinking. This made it difficult for an investor to make an independent decision on a stock.
Further research in psychology shows that more information does not necessarily improve judgment. Any extra information is helpful only if it comes without any bias or hype. But that is rarely the case. Business channels typically react to each and every piece of information they can lay their hands on.
More often than not, any fall in the price of a stock is attributed to the trouble that lies ahead. And when the price rises, good times are promised ahead. This leads to investors buying and selling more often because they take each piece of new information to be more meaningful than it actually is. As Surowiecki points out, “The problem of putting too much weight on a single piece of information is compounded when everyone in the market is getting that information”.
MUMBAI: “Water, water everywhere, but not a drop to drink” goes an old English saying by Samuel Taylor Coleridge.
If one were to paraphrase it in the context of the amount of news being churned out by the business news channels these days, it would be “information, information everywhere, but no time to think”.
The business media in India has come a long way from getting the unabridged report of Reliance Industries Ltd within a few days of its printing meant an exclusive story to news anchors providing real-time information to investors and making a big hit when the Sensex crossed 10,000 for the first time.
So, the question to be asked is, is more information good? The general rule is more information is always better. Investors need to have enough information on companies they are investing in. But more information need not always be good.
Let’s take the case of US stockmarkets, and the stockmarket bubble in the late 90s. This bubble coincided with the explosion of business news channels. The most influential of them is CNBC. This channel provided non-stop coverage of what was happening in various stockmarkets through a ticker tape running at the bottom of the screen.
As James Surowiecki points out in his book, The Wisdom of Crowds, “The network was, in one sense, just a messenger, letting the market, you might say, talk to itself. But as CNBC’s popularity grew, so did its influence. Instead of simply commenting on the market, it began - unintentionally—to move them.
It wasn’t so much what was being said on CNBC that prompted investors to buy and sell, so much as it was the fact that it was being said on CNBC”.
Economists Jeffrey Busse and T Clifton Green carried out a research on how markets reacted to information provided in the ‘Morning Call’ and the ‘Midday Call’ segments on CNBC. These segments, which were broadcast when the market was open, gave analysts’ views on individual stocks. When the recommendation on a stock was positive, the price of the stock went up within the first 15 seconds of the programme. When the recommendation was negative, the information was incorporated into the stock price over a period of 15 minutes.
The point that clearly emerges here is that investors were not reacting to the content of the report. In 15 seconds, it’s not humanly possible to decide whether what was said in the report made sense. As Surowiecki points out, “All the investors, or speculators, cared about was that because CNBC said it somebody would be trading on it. Once you know that other people are going to react to the news, the only question becomes who can move fast enough”.
CNBC and other business channels bombarded investors with news. At any point of time, an investor knows what other are thinking. This made it difficult for an investor to make an independent decision on a stock.
Further research in psychology shows that more information does not necessarily improve judgment. Any extra information is helpful only if it comes without any bias or hype. But that is rarely the case. Business channels typically react to each and every piece of information they can lay their hands on.
More often than not, any fall in the price of a stock is attributed to the trouble that lies ahead. And when the price rises, good times are promised ahead. This leads to investors buying and selling more often because they take each piece of new information to be more meaningful than it actually is. As Surowiecki points out, “The problem of putting too much weight on a single piece of information is compounded when everyone in the market is getting that information”.
posted by Vivek at 9:39 PM
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