Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media

Thomas Schuster

Finance from University Library of Munich, Germany

Abstract: A widely held belief in financial economics suggests that stock prices always adequately reflect all available information. Price movements away from fundamentals are assumed to occur only infrequently, if at all. „False“ prices are supposed to be corrected by the counter-actions of „rational“ investors reestablishing equilibrium. However, empirical evidence of widespread irrationality among investors as well as theoretical insights into the properties of complex systems suggest that this view is too static. In fact, it can be shown that under certain conditions dynamic disequilibria have a considerable probability of being „locked in“. The mass media play no mean role in this: By conditioning trend-following behavior and fostering coordination among large numbers of investors, the media can help bring about such destabilizing moves. Media attention can induce positive feedback by increasing the level of excess noise in the market while decreasing the number of perceived behavioral options. Meta-communication thus generated is a prime source of instability in financial markets.

JEL-codes: C70 C71 D80 D81 G00 G10 G12 G14 G19 M41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2003-07-28
Note: Type of Document - ; prepared on PC; pages: 36
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0307014

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