Abstract
The presumption of US media outlets is tha
there is an attempt to present unbiased information to readers. However, there are a number of biases inherent in all financial publications. These biased are discussed in this article.
The bias related to taking money from financia
interests in the form of advertising in return for distributing overly optimistic information on stocks is well documented. There are many books on the subject, but the fact is rarely discussed in the media for because investment companies are such larg
advertisers that media companies do not want to compromise their relationship with them. As noted by James F. Wells
“They are usually trying to maintain a cozy relationship. This provides for example, the basis for the cozy relationship b
tween the media and their sponsors. Usually they overcome this potential image problem with sincere pronouncements of the very thorough coverage of events not in the sponsor’s worst interests.” – Understanding Stupidity
The system roughly
works in this way:
- Investment companies have “analysts” who pretend to present objective information to media outlets.
- The media outlets then uncritically repeat these recommendations to the consumers of their peri
dical. - Undisclosed is that these investment companies often already hold positions in “recommended” stocks or are providing positive recommendations in return for underwriting fees with other related companies.
(Exactly how this works is explained in the section on IPO Distributions to Connected Investors section of the article Do You Have Enough Assets to Get “A” Advice?)
This is referred to as supply side bias
While it is the most well known type of bias, in fact there is also a demand side bias which also works to degrade the information provided by media outlets.
Research into bias in financial publications performed at Stanford University resulted in
the following quotation:
“Where we are certain that bias is conscious is in the personal finance publications emphasis of past returns over expenses. As one former mutual fund reporter has writer: “Mutual fund reporters lead a secret investing
life. By day we write “Six Funds to Buy Now!” We seem delighted in the dangerous sectors like technology. We appear fascinated with one week returns. By night, however, we invest in sensible index funds.“
That is, consumers want their publica
ions want to appear topical and exciting, even though this leads to recommendations which are more poorly performing than lower risk investments. Of course, since so few publications track the performance of their recommendations, and so few people bothe
to check, magazines can afford to make recommendations that perform poorly. This works in foreign policy as well. History is poorly tough and highly filtered in the US. Secondly, people quickly forget events that they themselves live through.
While advertising is a supply side bias in media, sensationalism of this sort can also be correctly observed as a demand side bias which is “reflecting the news providers” profit maximizing choice to cater to the preferences of the consumer. (see more o
by selecting our section on Demand Bias) Both forms of bias, supply and demand reduce the accuracy of financial reporting. Television news shows demonstrate similar biases, however level of information provided is of even lower quality. It generally hol
s the more expensive the media system (and television is very expensive) the more controlled it is by power interests. Lower cost media such as low powered radio and blogs tend to have the lowest degree of
ensorship and catering to power interests.
The Third Bias: Source Protection and Quid Pro Quo
In addition to supply and demand bias there is what we will call the quid pro quo bias. This type of bias is not exclusi
e to finance reporting and was well explained in the research into The Media and Asset Prices:
“An important asset in a journalist’s professional portfolio is the privileged sources of information she has access to. To maintain access to
hese sources journalists establish a quid pro quo (relationship). The source repeatedly reveals valuable information to the journalist in exchange for a positive spin on the news being revealed.” – Unknown
The Net Result of these Three Biases
The three biases we have covered thusfar are:
- Supply side bias
- Demand side bias
- Quid pro quo bias
The unstated assumption of media and in fact all learning systems is that both reporters and news consumers are both seeking objectiv
information. This is not a fair representation of how the information is presented, how humans learn or how information is gathered by journalists. However, this is the model presented to the public, and generally accepted by the public regarding how me
ia systems work.
Further research into the demand bias has found specific attributes of news consumers. It is critical to understand this to have a proper conception of how people filter information presented to them:
- They tend to search out information that conforms with previously held beliefs.
- They tend to believe and remember information that conforms with their previously beliefs.
- They tend to respond to sensationalism, meaning that esoteric and new, though risky, investments may be emphasized to the detriment of stable proven investments.
- Very few news consumers are aware of their own biases.
These three biases Demand, Supply and Quid Pro Quo all work against what is the stated objective of these news outlets and of those people consuming the news from these outlets. However the stated purpose of news outlets is not the actual purpose. The actual purpose is to make money for themselves. A financial media outlet can make the most money for itself by courting advertising dollars by being investment company friendly in its articles and or shows (supply bias), by providing exciting sensational news to its customers (demand bias), and by refraining from criticism and maintaining the relationships with its information suppliers (quid pro quo bias)Technorati Tags: writing bias, financial bias, media corruption
