Market Analysis

Anecdote Is no Antidote

We're pretty hard on the media here at MarketMinder.

We're pretty hard on the media here at MarketMinder. But we don't want them to take it too badly. It's not their fault, really. Cross our hearts. Let us explain. As a going concern, the media (to clarify, we mean the reporting press, not entertainment) has two basic drivers:

1. The profit motive. 99% of news is produced by for-profit enterprises. This means the press has an incentive to sell more media and compete with others trying to do the same. The easiest way to consistently sell media is to make people believe they need to consume the content offered. They only way to do that is to make the content seem important—urgently important. The only way to make things seem urgent is through fear. Thus, the media has an incentive to be dour, to make us worry and create angst. It sells papers.

2. Reporting news! Outside of profit, the press is designed to report what's going on out there. Really!

News is story; news is narrative. Facts are not interesting; data dumps are bores. What's riveting, what really gets the juices flowing and sells papers, is narrative. One of the best ways to interest people is reporting news as "story." That is, information with a plot. Never mind that most stories don't have so neat and tidy a structure as we'd like—journalists will find a way to frame it as such. This leads us to empathy. Empathy is another characteristic of a good story—you've got to make the thing hit home, people must be able to relate to what's going on, otherwise it falls flat.

What's the best way to show the full story, sow fear, generate empathy, and make sure people want to consume the news? Anecdotes.

Let's have a look at a smattering of today's top headlines:

Corporate Debt Risk Jumps on Concern over Bear Stearns Funds
By Hamish Risk and Shannon D. Harrington, Bloomberg

GE and Pearson Decide Not to Pursue Dow Jones
By Kathryn Kranhold, Dennis K. Berman and Sarah Ellison, The Wall Street Journal(*site requires registration)

At Wal-Mart, a Back Door into Banking
By Michael Barbaro and Eric Dash

These are all anecdotal stories in the sense that they tell us nothing about the broader market—they're just about one individual instance. The goings on of today's biggest companies rarely—if ever—have enough clout to move an entire market. Yet, that's just what many tend to think—if it's happening for one company, it's got to be happening everywhere! Thus, the dangers of anecdotal thinking.

These kinds of stories are on front pages everywhere, everyday. The editorial decision to highlight such anecdotes influences us greatly: What makes the front page, or what is included at all, inherently biases how people think about it. If it's there…it must be really important!

But often, it's not. The media is very quick to intone that Bear Stearns' Hedge Fund woes could be "just the tip of the iceberg" and the cause of increasing credit risk. But common sense shows that's highly unlikely. There are thousands of hedge funds, and many are started and closed each year, involving billions of dollars. A couple Bear Stearns funds are a pittance.

A sharp investor looks for the broad trends, uses data and scaling to understand if something is truly significant. That's why MarketMinder often refers to investing as a scientific endeavor. Seeking objective results is what it's all about. Anecdotes are opposite to objectivity.

This isn't the media's fault. It is what it is. The human brain was set up for stories—stories are the primary way in which complex information was originally handed down before the days of paper and printing. News happens and the best way for the media to report it is by story. It's their job. Your job as an investor is to be able to decide for yourself what's important and what isn't.

Ignore the anecdotes and figure out the truth—that's the antidote to better investing.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.