So much for objectivity.
A recent study on the correlation between stock market flows and the language used in financial journalism suggests traders and reporters are drinking the same Kool-Aid.
The Toronto Star reports that two computer scientists at the University College Dublin looked at financial news stories from three leading sources over a four-year period — including the global financial crisis. They found that as markets rose, the diversity of nouns and verbs used by journalists shrank. The higher the indices, the less diverse the coverage.
Once markets receded, language diversity returned.
Tone played a part as well, with positive words crowding out negative ones during bubbles. In normal times, positive and negative language co-exists.
So what does this mean? Well, Warren Buffett once said investors should aim to be fearful when others are greedy, and greedy when others are fearful. I assume he was referring to players in the market. But if the findings of this study are correct, investors would be wise to take media coverage into consideration as well.
So the next time you notice that business journalists are gushing about all the money everyone’s making, be afraid. Be very afraid.