Why Fake News Is So Harmful to Investors
Markets are different from politics; they punish those who believe what isn’t true.
Bloomberg, October 23, 2017
Facebook Inc., Alphabet Inc. (Google) and Twitter Inc. are under scrutiny for the roles each played in Russia’s attempt to manipulate the public and disseminate fake news during the 2016 political campaign. All three companies will face congressional questioners about their respective roles in the election-tampering investigation.
Consumers of political news are subject to the same sorts of biases and cognitive errors that affect investors. 1 However, there is a significant difference between these two types of news consumers: traders have a fast and measurable feedback loop — investment returns — that penalizes those who believe things that are not true. Partisans suffer no tangible losses when they indulge their biases, enduring nothing more than the occasional shock of being proven wrong on Election Day.
Let’s take a real-life example from the investing world — the iPhone 7. Shortly after the September 2016 introduction, stories circulated that initial sales were disappointing, and you could sense that the Apple haters were intent on scoring points. As it turns out, that reporting was off the mark; sales of the iPhone7 turned out to be great and since then the company’s shares have gained more than 50 percent. The penalty for those inclined to believe this news was an expensive, missed investing opportunity.
Consider also what happens when investors latch onto a positive narrative that turns out to be false . . .
continues at: Why Fake News Is So Harmful to Investors