The risk of 'fake news' for financial markets

New study reveals extent of media influence on investor choices

The risk of 'fake news' for financial markets
Steve Randall
The current concern surrounding ‘fake news’ may be mostly centered on its influence on political outcomes, including elections; but there is also a risk for the financial markets and investors’ decisions.

There have already been several cases of high profile companies targeted online by hoaxers with potentially damaging impacts on their share prices.

Starbucks, Costco, Microsoft and beauty chain Ulta have all suffered fake news stories which could have left investors concerned about the direction of their businesses.

“It hurts businesses financially and it also makes things toxic for them by destroying trust and creating an atmosphere in which people don’t know who they can trust,” Brooke Binkowski, managing director of fact-checking site told the Financial Times.

But what about the ‘real media’
While fake news is a growing problem, there is also risk in the wider media, especially the financial press.

Researchers from the University of Luxembourg studied the effect that the financial press can have on investors’ decisions – both negative and positive impacts.

Eighty participants with a background in economics were shown various news items about stocks, with the companies’ names anonymized.

Variants of the reports contained either positive words (“healthy”, “encouraging”) or negative words (“devastating”, “shocking”) but the information was otherwise the same.

The participants were then asked to forecast the performance of the stocks and, even though the information may have suggested otherwise, the economists were influenced by the language chosen with positive evaluations from the positive reports and negative views concluded from the negative reports.

"We live in the age of 'fake news' and 'alternative facts', of fast-paced online and social media. Our research clearly shows the importance of factual and accurate reporting and the power that words yield over investors and, by extension, stock markets and the economy," said Prof. Roman Kräussl from the University of Luxembourg's Luxembourg School of Finance.