The role of news events in affecting the market seems often to be delayed, and to have the effect of setting in motion a sequence of public attention. Attention may be to facts that may already have been well known, or to images or stories. The facts may have been ignored or were in the past judged as inconsequential, but attain newfound promi-nence after some news event. These sequences of attention may be called cascades, as one thing attracting attention leads to another and then to another.
At 5:46 a.m. on Tuesday, January 17, 1995, an earthquake measuring 7.2 on the Richter scale struck Kobe, Japan. It was the worst earthquake to hit urban Japan since 1923. The reaction of the stock markets of the world to this event provides an inter-esting case study, since in this case we know without doubt that the precipitating event, the earthquake, was truly exogenous and not itself generated by human activ-ity or business conditions, not a response to a subtle hint of economic change, nor the result of a confluence of unusual values of conventional economic indicators. In the Cutler, Poterba, and Summers list of media explanations for the 50 largest postwar movements in the Standard and Poors Index in the United States referred to earlier, not a single one of the explanations referred to any substantial cause that was defi-nitely exogenous to the economy.4
4. That is, there is none unless one counts as substantial President Dwight Eisenhower’s heart attack on September 26, 1955.
Irrational Exuberance in the Media 91
The earthquake took 6,425 lives. According to estimates by the Center for Indus-trial Renovation of Kansai, the total damage caused by the earthquake was about US$100 billion. The reaction in financial markets was strong, but delayed. The Tokyo stock market fell only slightly that day, and prices of construction-related companies generally rose, reflecting the expected increased demand for their products and ser-vices. Analysts reported at that time that the probable effects of the earthquake on corporate value were as yet ambiguous, since the wave of rebuilding after the quake might stimulate the Japanese economy.
The biggest reaction to the earthquake did not come until a week later. On Janu-ary 23, the Japanese Nikkei share index fell 5.6 percent on no apparent news except the gradual unfolding of numerous news accounts of earthquake damage. Over the 10 days following the earthquake, the Nikkei lost over 8 percent of its value. If viewed as the direct result of the earthquake damage alone, the loss of value would be an overreaction.
What was going on in investors’ minds over the 10 days following the earth-quake? Of course, there is no rigorous way to find out. We know only that over this period the Kobe earthquake dominated the news, created new and different images of Japan, and may have led to very different impressions about the Japanese economy.
Moreover, the quake sparked discussions about the risk of an earthquake centered in Tokyo. Despite the fact that geological evidence suggesting that Tokyo is at risk for a major earthquake was already known, greater attention was now focused on this potential problem. The damage that an earthquake of the severity of the 1923 quake could cause to modern-day Tokyo was put at US$1.25 trillion by Tokai Research and Consulting, Inc. (“The Tokyo Earthquake: Not ‘If’ but ‘When,’” Tokyo Business Today, April 1995, p. 8).
Even more puzzling than the direct effect of the Kobe earthquake on domestic Japanese markets was its effect on foreign stock markets. On the day that the Nikkei fell 5.6 percent, the Financial Times Stock Exchange 100 Index in London fell 1.4 percent, the Compagnie des Agents de Change 40 Index in Paris fell 2.2 percent, and the Deutscher Aktien Index in Germany fell 1.4 percent. The Brazilian and Argentine stock markets both fell about 3 percent. These diverse countries around the world suffered no earthquake damage on this occasion.
The best interpretation of the effects of the Kobe earthquake on the stock markets of the world is that news coverage of the earthquake, and of the accompanying stock market declines, engaged the attention of investors, prompting a cascade of changes that brought to the fore some more pessimistic factors.
Another market reaction to news illustrates how media attention may, through a sequence of events, foster a belief that some news that would normally be considered nonsense and irrelevant by nearly all investors may eventually be widely taken seri-ously. A sequence of news stories about Joseph Granville, a flamboyant market fore-caster, appear to have caused a couple of major market moves. The only substantive
content of these media stories was that Granville was telling his clients to buy or sell, and that Granville himself was influential.
Granville’s behavior easily attracted public attention. His investment seminars were bizarre extravaganzas, sometimes featuring a trained chimpanzee who could play Granville’s theme song, “The Bagholder’s Blues,” on a piano. He once showed up at an investment seminar dressed as Moses, wearing a crown and carrying tab-lets. Granville made extravagant claims for his forecasting ability. He said he could forecast earthquakes and once claimed to have predicted six of the past seven major world quakes. He was quoted by Time magazine as saying, “I don’t think that I will ever make a serious mistake in the stock market for the rest of my life,” and he predicted that he would win the Nobel Prize in economics (Santry 1980a,b).
The first Granville episode took place on Tuesday, April 22, 1980. With the news that he had changed from his recommendation (from short to long), the Dow rose 30.72 points, or 4.05 percent. This was the biggest increase in the Dow since Novem-ber 1, 1978, a year and a half earlier. The second episode occurred on January 6, 1981, after Granville’s investor service changed from a long recommendation to a short recommendation. The Dow took its biggest dive since October 9, 1979, over a year earlier. There was no other news on either of these occasions that might appear re-sponsible for the market change, and on the second occasion both the Wall Street Journal and Barrons squarely attributed the drop to Granville’s recommendation.
Can we be sure that media reporting of Granville and his supposed powers of prognostication caused these changes? Many people wondered if the Granville ef-fect was not just a coincidence that the news media exaggerated. We can be sure that a sequence of news stories about Granville’s pronouncements had a cumula-tive effect on national attention, and that public reactions to his pronouncements and to market declines at the time of his announcements were fundamentally al-tered by this cascade.5
References
Cutler, David, James Poterba, and Lawrence Summers, 1989, “What Moves Stock Prices?” Jour-nal of Portfolio Management 15(3): 4–12.
5. Professors Gur Huberman and Tomer Regev, of Columbia University wrote a case study of the soaring price of an individual company’s stock in response to a newspaper story that, while compellingly written, actually revealed no news. The share price of EntreMed rose from 12 to 85 from the close of the market the day before to its opening on the day of a front-page New York Times story that described the potential of the company’s drugs to cure cancer. They document that every fact in the story had already been published five months earlier (see Huberman and Regev 1999.) It is plausible—although the authors do not document this—that many of the buyers of EntreMed shares on that day knew there was no news in the story, but merely bought thinking that a story that was so well written and featured so prominently would boost the share price.
Irrational Exuberance in the Media 93
Desmond, Robert W. 1978. The Information Process: World News Reporting to the Twentieth Century.
Iowa City: University of Iowa Press.
Garber, Peter. 2000. Famous First Bubbles: The Fundamentals of Early Manias. Cambridge, Massa-chusetts: MIT Press.
Huberman, Gur, and Tomer Regev. 1999. “Speculating on a Cure for Cancer: A Non-Event That Made Stock Prices Soar.” Columbia University, Graduate School of Business, New York.
Unpublished manuscript.
Kindlberger, Charles P. 1989. Manias, Panics and Crashes: A History of Financial Crises, 2nd ed.
London: Macmillan.
Niederhoffer, Victor. 1971. “The Analysis of World News Events and Stock Prices.” Journal of Business 44(2).
Pliny the Younger. 1969. Letters and Panegyrics, book 6, no. 19. Translated by Betty Radice Cam-bridge, Massachusetts: Harvard University Press.
Santry, David. 1980a. “The Long-Shot Choice of a Gambling Guru.” Business Week, May 12, p. 112.
———. 1980b. “The Prophet of Profits.” Time, September 15, p. 69.
Shiller, Robert J., and William J. Feltus. 1989. “Fear of a Crash Caused the Crash.” New York Times, October 29, section 3, p. 3, col. 1.
Tokyo Business Today. 1995. “The Tokyo Earthquake: Not ‘If’ but ‘When.’ ” April.
Zaret, David. 1999. Origins of Democratic Culture: Printing, Petitions, and the Public Sphere in Early-Modern England. Princeton, New Jersey: Princeton University Press.
6
Distributing News and Political Influence
David Strömberg
The mass media affect both who receives political information and what informa-tion they receive. This influences public policy, because politicians tend to favor informed voters and well-covered issues. Politicians do so for good reason: not only are well-informed voters more likely to vote than uninformed voters, but they are also more likely to vote for those candidates who further their interests. For example, Delli Carpini and Keeter (1996) found that in the 1988 U.S. presidential election nearly 9 out of 10 of the most knowledgeable 10 percent of survey respon-dents voted, while only 2 out of 10 of those in the least informed decile did so (see also Larcinese 2001). In addition, Stein and Bickers (1994) found that people who are well informed in general are also more likely to be aware of new projects in their districts. Furthermore, voters who are aware of new projects are more likely to vote for their incumbent representative, controlling for the actual increase in awards to the district. This chapter discusses my recent work on how the mass media may affect policy formation.