How the Media Blows Bubbles

The first real newspapers appeared around the 1600s in Holland, Yale economist and recent Nobel Prize winner Robert Shiller mentioned at a conference in Orlando last week. That was also around the time the Dutch tulip bubble formed. "I can't find much evidence of financial bubbles before then," Shiller said.

We've been having them consistently ever since.

Those two factors -- newspapers, then bubbles -- aren't coincidental, Shiller asserted. "The big fluctuations of bubbles are primarily social-psychological changes," he said. You need a well-armed media to drive that change. "You can't have a bubble with word of mouth."

Think about the last three bubbles.

Radio went mainstream in the 1920s. For the first time ever, Americans were connected to each other live across the country, listening to new ideas they had never been exposed to. "It connected you to the world," Shiller said. Radio not only made people optimistic about the future, but it spread new ideas -- like the power of investing in stocks, spawned in 1924 by Edgar Lawrence Smith's book Common Stocks As Long Term Investments. Soon came one of the biggest stock market bubbles in history.

The Internet did the same 70 years later. Virtually overnight, the entire world was connected for the first time, sharing ideas and being exposed to thoughts traditional media outlets had never covered. "It was hard for this not to make you optimistic," Shiller said. In the mid-1990s, Wharton economist Jeremy Siegel wrote the book Stocks for the Long Run, echoing Smith's message from the 1920s. A new mindset took hold. Stocks tripled in less than seven years. You know how the story ends.

Same for housing. From 1890 through roughly 1990, inflation-adjusted home prices nationwide were flat, if not declining. Searching through more than 100 years of newspaper archives, Shiller found almost no mention of home prices, except in construction trade journals. "It just wasn't on people's minds," he told me a few years ago. "No one cared. One expected to buy a home as part of normal living and didn't think to worry about what would happen to the price of homes." That all changed in the early 2000s, with a burst of media coverage on rising home prices. "In June 2005, there was this media explosion on housing as an investment," Shiller said. Newspapers, TV, and the Internet went nuts about how much money could be on homes. A TIME magazine cover that month read, "Home $weet Home." Prices peaked soon after.

Bubbles are complicated. No one can point their finger at a single cause. But more than most economists, Shiller focuses on the psychological aspect of bubbles. And wherever you find big psychological shifts, you find the media. "The news media are fundamental propagators of speculative price movements through their efforts to make news interesting to their audience," he said.

But is this cause and effect? Are stock and housing prices going up because the media is talking about them, or is the media talking about them because they're going up?

It's not hard to say it's the former.

In his book Irrational Exuberance, Shiller writes that most modern bubbles are global. Stocks didn't just rise in America in the 1990s, they surged all around the world. Same with real estate in the last decade. Home prices in Belgium, Spain, and the Netherlands surged more than American home prices last decade.

But most people don't pay attention to foreign media. So how can the media explain why bubbles are global? Shiller has an idea:

Of course reporters of the news, especially the serious news, feel an obligation to read the news from other countries, so as not to miss an important piece of news. But, beyond this, reporters learn from experience that an excellent way to produce good copy is to piggyback on others' successes. A sequence of stories in foreign news media is a sign of a successful story, and such a success can probably easily be replicated at home if the story is copied with only a few tweaks and adjustments for local tastes and associations.

As a financial writer, I can attest this is true. 

Whenever a bubble bursts, we immediately seek someone to blame. It's usually people of authority: Congress, the president, the Federal Reserve, or Wall Street. All play a role in bubbles. Maybe they plant the seed, or ignite the fire. But it's often the media that helps grow that fire into a bubble. Laws are local. Ideas are local. Financial advisers are local. Media is the biggest thing connecting investors' mindsets around the world.

Two years ago, I asked Chrystia Freeland, a former Reuters managing editor now running for political office in Canada, if the media played any role in the 2008 crash. Not really, she said. "The world has been perfectly capable of recessions and long depressions long before the age of 24/7 media."

But was the media responsible for cheerleading the bubble before the crash? Maybe. "If you want to beat your breast as a journalist and say, 'Mea culpa,' really what we should be blamed for is not sounding the alarm more before 2008," Freeland said. "That's the big guilt, and yeah, I think the media is guilty, just as a lot of analysts were, a lot of bankers were, a lot of regulators were, and a lot of lawmakers were." 

The media is more interconnected and headline-hungry than ever. That means you, the investor, need to be as cautious and selective with how you get your information as ever.

Last year, I created a how-to guide for reading financial news. In short, the three most important things you should do when reading financial news are: 

1. Read stuff you know you're going to disagree with.

This is how you prevent confirmation bias.

2. Read old news.

This is how you learn not to take forecasts seriously.

3. Don't think every news story requires action on your part.

Because it doesn't.

At the end of his talk, someone asked Shiller if more information and a 24/7 media mean more bubbles. "Yes, absolutely," he said. "Bubbles will get bigger."

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

No Pitch


Read/Post Comments (19) | Recommend This Article (71)

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  • Report this Comment On November 21, 2013, at 5:43 PM, chairmanwow wrote:

    Interesting piece, Morgan.

    I wonder to what extent the media is responsible for preventing bubbles. It's hard to turn on any sort of financial news program without seeing some fund manager, economist, or pundit warning that the stock market is becoming a bubble, that interest rates will soar as soon as the Fed starts reducing bond purchases, and that economic growth is too anemic for the equity rally to continue.

    If the media can propagate market euphoria, then can't it also propagate the warnings of doom-sayers, thereby minimizing the risk of bubbles? I find it hard to say which force is more powerful.

  • Report this Comment On November 21, 2013, at 9:41 PM, Mathman6577 wrote:

    The best thing yo do is to ignore the media when it comes to the stock market. CNBC who?

  • Report this Comment On November 22, 2013, at 2:11 PM, banmate7 wrote:

    As in all things in life, one has to sift available information and apply knowledge as objectively as possible. This is particularly true when it comes to finance, where ignorance and manipulation are often louder than salient facts and analysis. But I wouldn't ignore this "noise" either.

    Why? Sometimes sentiment pretty clearly signals irrational exuberance or pessimism. This can illuminate one's investment decisions.

    This worked pretty bluntly in 1999 and 2008. It complemented metrics around valuations & leverage. No, I didn't know exactly when these crashes would occur, but I nevertheless knew crashes were coming.

    Likewise, when I see extremely negative sentiment against a blue chip selling at value, it tells reinforces a buy. I've bought IBM & CAT recently like this. I refuse to buy CRM, WKDAY, and LNKD, applying this the other way.

    Sentiment analysis can help you better fine tune your investing. Doesn't hurt to listen to both the cattle drivers and the herd.

  • Report this Comment On November 22, 2013, at 4:37 PM, Risky88 wrote:

    If only we could learn from our past and have common sense.

    There would be no need for laws.

  • Report this Comment On November 22, 2013, at 5:11 PM, AnsgarJohn wrote:

    Bitcoin

  • Report this Comment On November 22, 2013, at 6:15 PM, xetn wrote:
  • Report this Comment On November 22, 2013, at 9:09 PM, wildeweasel wrote:

    I feel it is best to do the opposite of whatever the media is saying I should do. Find the stocks the media isn't talking about right now they will be the best deals.

  • Report this Comment On November 22, 2013, at 10:16 PM, Tortoise125 wrote:

    I have learned to generally ignore media comments regarding our investments. Most of the advice is centered on making money trading stocks. My investment strategy for 45 years has been focused on Dividend-Growth and now, at 87 years of age, I have no regrets. The results have been dividend income growth and price appreciation. We have been rewarded in two impressive ways!

  • Report this Comment On November 22, 2013, at 10:56 PM, SkepikI wrote:

    Morgan: No kidding.... I will be more seriously interested in your report, ten years hence, on how your strategy and recommendations worked out. Until then I remain....y-a-w-n Skeptical.

  • Report this Comment On November 23, 2013, at 9:19 AM, cmalek wrote:

    Over the years media's attitude towards newsworthy stories has changed. As access to news has become wider and faster, the fact checking by the media has become less and less stringent. The media's obsession with "public's right to know" and 'being firstest with the latest" has resulted in unsubstantiated rumors being reported as the Gospel truth.

  • Report this Comment On November 23, 2013, at 10:15 AM, wjcoffman wrote:

    Or, "How the Media Blows".

    In many other articles I've been reading how Google says (and similar 'thinkers') censorship will be dead in the coming years (can't recall the time frame). It got me to thinking - is intentional misinformation the same as censorship? Probably not, but if it's not the same as censorship I certainly think it is worse.

    I need to find something else to occupy my time.

  • Report this Comment On November 23, 2013, at 7:34 PM, phexac wrote:

    Sounds like we should read the old dot.com era papers and then compare them to MF articles about NFLX...

  • Report this Comment On November 23, 2013, at 10:36 PM, whyaduck1128 wrote:

    The title of this article is "How the Media Blows Bubbles." Having spent a few years in a media corporation many years ago, and having observed the media for over 50 years and having seen what passes for journalism in the last 35+ years, I think the title is one word too long.

  • Report this Comment On November 24, 2013, at 9:27 AM, Compostheap wrote:

    Hmmm, or to put it another way: Who doesn't blow bubbles?

    Like the Marshall McLuhan's, 1964 book, "Understanding Media: The Extensions of Man" or later, "The Medium is the Massage," McLuhan argued the medium itself, not the content had to evaluated…at that time in 1964, the impact of the new medium of television and bringing a newscast of a heinous crime into a home at dinnertime…does the content, the heinous crime, eventually become acceptable, more prevalent?

    To bubble or not to bubble and how far to blow them...

  • Report this Comment On November 24, 2013, at 3:49 PM, shoemaker17 wrote:

    Great article Morgan. I see the same thing with sports media(Espn). Before it was a juggernaut, the sports landscape in all major sports was on a more even playing field. Now, we have only a handful of teams that can really have a chance at winning a championship. Yankees, Red Sox, Heat, Celtics, Lakers-ish, Alabama, USC, Duke, Kansas, Kentucky, Patriots, etc. The media only covers the best teams, and in turn, that's where the best players, coaches, and money flow towards. Could there, in fact, be a sports bubble where fans grow increasingly frustrated with only a few teams having a legitimate shot? I'm sick of the blowouts. I have a feeling others do too, at an increasing rate.

  • Report this Comment On November 25, 2013, at 2:13 PM, natscientist wrote:

    @compostheap: '...McLuhan argued the medium itself, not the content had to evaluated...'

    in that case it will be helpful to keep in mind,

    "the Media lights on fire that which it cannot consume raw."

  • Report this Comment On November 25, 2013, at 6:21 PM, Zombie111 wrote:

    Mass hysteria is in itself not new, but the power of the means of communication is exponentially greater. I was reminded of Orson's Welles' broadcast of the War of the Worlds. But that was intentionally fiction. The bubbles created now are probably not intentional, but still powerful. (The radio broadcast's effect was magnified because of the political tension in 1938, but we always seem to have political tension in this century).

  • Report this Comment On November 29, 2013, at 2:34 PM, cmalek wrote:

    "But that was intentionally fiction."

    And all the pundits and "analysts" pumping up stocks is not "intentional fiction"? And "Urgent Alert for All Credit-Card Holders" is not "intentional fiction"?

  • Report this Comment On December 08, 2013, at 7:07 PM, scepticalh wrote:

    This has to be true, that the media, in Ted Turner's words, are in the business of selling eyeballs to advertisers, and what better way to get the owners of those eyeballs focused than to tell them that they might be missing out on the next big thing. But bubbles can only inflate if somebody provides the wind, and that's the role of bankers who advance credit to allow speculators to bid up prices on the security of those very same rising prices. If the housing market's rising, you can borrow money against the rising value of the house you want to bid for. If the stock market's rising, you can borrow money against the rising value of the stocks you want to buy. The media serve as ringmaster, but it's the bankers who put on the show.

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