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Do You Drive Financial Media Bias?

If you want to see who controls media bias, take a look in the mirror.

At least, that is the conclusion drawn from research by University of Chicago economics professor Matthew Gentzkow, the 2014 winner of the John Bates Clark Medal.

The medal is awarded to an American economist under the age of 40 “who is judged to have made the most significant contribution to economic thought and knowledge.” Past recipients include household economic names such as Milton Friedman and Paul Krugman.

One of Gentzkow’s contributions is the study, done with University of Chicago colleague Jesse Shapiro, of what accounts for bias across different news organizations. In a paper published in 2010, they demonstrate the biggest driver of media slant is the audience, who are seeking like-minded news, and not the media owners, who have an economic incentive to align their content with the ideologies of their consumers. Based on their analysis, around 20% of the variation in slant between newspapers can be explained by consumer preferences.

If political news coverage is slanted by the views of the audience, as found by Gentzkow, does a similar consumer-media relationship exist within financial news? Some have criticized the financial media for being a platform for fund managers in exchange for streams of advertising revenue.

But, what if the bias of financial media organizations is, in fact, just a way of giving investors what they want? A 2011 study, titled Stock Return and Financial Media Coverage Bias, by Shengle Lin at the University of California, Berkeley, indicates there is a strong correlation.

According to Lin’s research, financial media have a long-run coverage bias toward stocks that have generated high returns in the past. Due to media’s disposition to sensationalism, breaking news can create a short-run coverage bias toward stocks that experience extreme returns, whether high or low, but the media tend to continue reporting only on the top performers while covering the underperformers less and less.

Moreover, Lin determines the inclination to cover past winners isn’t explained by the promotional efforts of financial firms. Instead, he argues, it is driven by investors seeking information that aligns with their investment decisions. For example, the long-run coverage bias of past winners directly mirrors investors’ penchant to wrongly chase returns. Since they may have purchased or are considering purchasing stocks with recent high returns, they likely prefer news coverage about “hot” stocks that also have strong past performance.

Therefore, some investors are prisoners of their own devices. What about good investors on the opposite end of the spectrum, who aren’t simply tuning in and dropping out?

Good investors don’t tune out media “noise” to make investment decisions, they are just confident in their investment decisions from the start, and, therefore, unlikely to be led astray by the market news du jour. They can digest financial news with an air of skepticism. They pay attention to names and titles of the TV “experts”, as many financial news personalities also work in financial services. Most importantly, they ignore bombastic proclamations of doom or promise and always disregard the noun that directly follows these two words: “buy” and “sell.”

Ultimately, there is no reason to advertise in something that has no audience. Hence, financial media – like all media – have an economic incentive to build and grow their following, even if it leads to an editorial bias. That is no reason to shut off the TV or cancel that subscription. Just realize some news stories aren’t meant for you, or for your investments.