STOCK GOODIES PLAYS OF THE WEEK

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Cultural Factors Causing Irrational Exuberance

The news media and new era thinking are among the cultural factors cited by Shiller. Yes, the media seems to keep popping up in the book. Maybe that is why technical analysts only look at price charts!

The speculative bubble was clearly aided and abetted by the news media. Newspapers, television, radio and Internet media compete for public attention. Sensational stories with sound bites are more likely to attract attention than drab analysis with numbers and facts. Despite an inattention to detail, the news media was always there with specific reasons for a stock market move. The media always found the perfect excuse or news event to justify the move - after the fact. It is kind of like a solution in search of a problem.



Robert Shiller notes that news of price changes is influential on investor behavior. In his survey after the crash on October 19th 1987, Shiller listed all the recent news events that seemed relevant and asked respondents to rate the stories. News of the October 14th price decline was also included in this list. At the time, this was the single largest one-day point decline in the Dow Industrials. Surprisingly, the stories relating to the past price declines were deemed the most significant news events. As Shiller states:

Thus it appears that the stock market crash had substantially to do with a psychological feedback loop among the general investing public from price declines to selling and thus to further price declines, along the lines of a negative bubble. The crash apparently had nothing particularly to do with any news story other than that of the crash itself, but rather with theories about other investors' reasons for selling and about their psychology.

New era economic thinking was also cited by Shiller as a cultural factor that contributed to the stock market bubble. New era thinking is not new. Stock market advances in the late 1800s, 1920's and 1960's were also facilitated by new era thinking. At the 1901 peak, new era thinking centered around railroads, big industrial trusts and the age of optimism. The roaring 20's were marked by the electrical age for big cities and the widening use of autos. The 1960's were punctuated by a baby boom, the proliferation of television and low inflation. And finally, the 1990s saw the Internet boom, low inflation, the new economy and the alleged end of the business cycle.