Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 8 December 2016

The reporting of market ups and downs is not really a joke

It began as part of my undergraduate lectures. After teaching students about the key role of expectations in influencing exchange rate movements, I joked they too could now become one of those City economists who comment on market movements. X goes up and the market falls - you explain the fundamentals. X goes up and the market rises, appearing to contradict the fundamentals - you say the markets were expecting a bigger rise in X. There is no data to contradict you, so no one will question your wisdom.

Companies pay market researchers tons of money to find out why people do or do not buy their products, so the idea that an individual can know why the market moves within hours of it moving is just nonsense. Yet day after day we see City economists telling us just this. They hardly ever express any doubt or uncertainty. They know if they did the media would regard that as boring, and choose someone else next time.

In writing posts I talked about why the media used City economists for this kind of commentary, because academics would be hopeless at it. In my lecture I said an academic, if asked by the media to comment about why sterling fell by 1% yesterday, would give one of two replies. Either ‘oh, did it, I hadn’t noticed - too busy marking’ or ‘who knows, there could be lots of reasons, we have no evidence on this at all’. But as I said it during the lecture I realised that it some way this was not really a story about how hopeless academics are in talking about daily market changes, but a story about how the media treats knowledge. After all, the second response is the truthful one. Even the first conveys some truth: unless you are speculating on the markets why does one day’s modest market movement matter?

The media use City economists because they are used to telling stories. Stories that will impress clients with lots of money to invest. As I’m sure Chris Dillow has written, people are swayed by confidence, even if that confidence is completely unfounded. Put a climate scientist, who being a scientist knows about all their doubts and uncertainties and is honest about them, in a debate with a media savvy climate change denier, and you will see that many will find the climate denier more convincing.

So the fact that the media gets City economists to tell their stories day in and day out tells us something interesting about the media. They seem quite happy to allow people to tell stories as fact, because it appears that they are asking an expert who ‘knows’. Now I’m sure the response would be by both the media and the City economist that of course everyone really understands that these are stories and not knowledge, and they are worth repeating because they are plausible stories. They could be true, but everyone really knows they are just conjectures based on little solid evidence.

But does everyone really know this? I’m sure the City economist knows this. I’m less sure about the audience, and even sometimes about the person interviewing the economist. This is a game of pretend that has been going on for so long that what is pretend has become real. Wouldn’t it be a good idea to insist on these City economists prefacing everything they say by ‘Of course we do not know, but my hunch is that …’ Isn’t it better to properly inform viewers of what is going on here, even if it does become a little repetitive? Or is informing the viewer not what this is about? And does this constant repetition of false certainty not have something to do with how City economists can be regarded by some policymakers as high priests to the fickle god of the market. 

It was interesting that some of the reaction I got to Saturday’s post was ‘why don’t forecasters tell people about these uncertainties’. Why are they not more modest? But the better ones are, and any academic who knows about macro forecasting will tell you how uncertain unconditional forecasting is. The fact that this knowledge is not reflected in how the media (or politicians) talk about them has everything to do with the media (and politicians). It suits most of the media (not all) to exaggerate the certainty, and then to express shock/horror when forecasts are wrong. And in a way it is a perfect example about the dangers of treating the media as just a harmless purveyor of news: you end up blaming the forecasters for something which is not their doing.


12 comments:

  1. I agree with you on this; the same point had occurred to me with respect to the daily commentaries on reasons for market action.

    However, my own view is that this is part of a wider issue about the media. We now have 24/7 media which expects news and, because of this, is forced to report "pseudo events", that is events which formerly would not have been reported.

    In my view so much of media these days is filling the vacuum and, in doing this, perhaps you have to resort to a degree of dumbing down to make it comprehensible to your audience, which these days is much wider than before.

    Your point may be reasonable; it is probably even right but your prescription may be lost on a limited attention span audience that is the internet these days and is the audience these comments are targeted at.

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  2. "I would like to get a proper, high-level response to the reason why the BBC has not started to use Prof Robert Shiller's approach to economics rather than the discredited Efficient Markets Hypothesis and Rational Expectations Theory. This battle has been going on for decades and I think Shiller's prediction of the Dotcom bubble in 1996 (it burst 2000) and his prediction of the housing bubble in 2004 (which peaked in the US in 2006) - Prof Shiller is the 'Shiller' of the Case-Shiller home price index Radio 4 sometimes cites - rather suggests it is time for a review. That the BBC continues uniformly to say that the FTSE went up or down for this or that reason when excess volatility is the accepted academic understanding of aggregate stock prices is strange indeed: it is Shiller's 1981 paper on this topic that has just been voted as one of the 20 most important papers of the century in the American Economic Review. Why the BBC still uses the EMH I cannot explain."

    BBC Trust response 6 Jan 2012:

    "While the Trust sets the overall framework, the BBC’s Editorial Guidelines, which set out the values and standards that all BBC output should meet, it is not involved in day to day operational or editorial issues, which are the responsibility of the Director General as Editor in Chief."

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  3. It should be fairly obvious what is going on here. There are those of us who still think democracy is the way to run a country and then there is a small networked global elite who want to see a new aristocracy in charge - in hock to global corporations and supported by a priesthood of economists who spend all their time emitting propaganda about how there is 'no alternative'.
    The result is governments tying their own hands so that they can no longer defend their citizens. Central banks run by technocrats, a European Union run by wonks trying to push a single currency with no effective transfer payment mechanism, brutal smackdowns of anybody who dares to question The Order.

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    1. I have no problem with technocrats running central banks, so long as they are economists -- ideally, experts in macroeconometrics and macroecononomics. Once you set goals and bound the limits of acceptable means, the question of what to do only is technical.

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  4. Brilliant post. Very true. I guess the appeal of city economists to the general audience is their ability to communicate eloquently to people who can easily cross verify with what is currently happening. On the other hand, academics tend to focus on methods which may sometimes alienate the general public. At the end of the day, the academic economist undertakes a more rigorous training and the contribution to developing models to digest historical facts, news, methods to forecast is massive. It is unfair about the level of asymmetry in remuneration.

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  5. I have worked in the financial markets. It was always amusing to read the local financial press the day after a major market move. You could be assured that the reported comments of a fund manager/whoever explaining the move would always offer an explanation supporting the move. The journalists knew who to interview to get the response they wanted or that was warranted. In other words, they had a pretty good idea who were the bulls and the bears or they would seek a comment from different fund managers until they got the comment they wanted. Like most news, it is confected.

    Henry

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  6. Very good points. How do weather forecasters in UK deal with uncertainty? Ours in the US (well at least in the Midwest where the weather segment is a large part of the news) have started mentioning that they look at different computer models and explain their forecasts in the context of the model in which they have the most confidence. This seems to be a step in the opposite direction from what you are discussing. Of course weather forecasts are easy to check and thus perhaps the forecasters need to be more up front about their accuracy.

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    1. Weather forecasters in the UK, and around the world, attempt to deal with uncertainty using "ensemble forecasting". A web search will give you a lot of information on this technique. The UK Met Office has been publishing details of the accuracy of their forecasts for many years; for a brief recent summary, see www.metoffice.gov.uk/about-us/who/accuracy/forecasts.

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  7. Eh? What climate scientist ever expresses doubts? To doubt even that the costs of mitigating global warming might possibly be very high and not a solar and wind powered pittance is to risk being cast out of the club as a climate denying heretic. I suggest you use physics next time.

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    1. See the last six paragraphs of www.bbc.co.uk/news/science-environment-38249208 for a recent example of a prominent climate scientist expressing doubts! And I think a professional physicist confronted, say, with a person who believed in the aether theory of light, would not express much doubt that the other person is a nutcase...

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  8. Does no-one see the similarity to general economic forecasting?
    Economists always 'forecasting' in hindsight?
    Saying 'if only they did this, then that better thing would have happened', having been unable to predict future in the first place?

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  9. While this is all no doubt true, there is a more basic and obvious reason. That is that City economists (and others in the City) send out briefing notes by email to financial and economics correspondents whenever anything of any potential newsworthiness happens containing a precis of their views and an invitation to get in touch for a further comment. They also send out similar notes when their departments have conducted original research, explaining clearly what its significance is.

    Academic economists do neither of these things - their collective comms strategy is poorly attuned to the daily news cycle - so it is unsurprising that they are quoted rarely and get few interview requests.

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