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What is the Media Effect?

By Marlene Garcia
Updated Jan 23, 2024
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The media effect is a financial theory that evaluates how coverage of a topic by the news media influences investors, borrowers, and consumers. It applies to the mortgage industry and stock market activity, and measures the effect of major news stories on spending, refinancing, and investing. Often called behavioral finance, the theory appears to apply internationally and includes the social media effect.

One of the most visible trends in media effect occurs in the mortgage industry. When major news outlets report on declining interest rates, it typically generates a wave of property owners refinancing their loans. The coverage also increases the prepayment rate of borrowers when prominent stories appear about interest rates.

Financial markets may also be influenced by the media effect. It is based on the premise that individual investors are influenced by information they receive, whether the information is justified or rational or not. This might explain abnormal changes in stock market prices that cannot be rationalized through historical performance or analytical theories.

Studies have shown the volume of trading commonly spikes after media reports on a particular industry or corporation reach investors. This might influence the price of shares in a certain area by sparking excess buying or selling. Stock market activity in a particular sector linked to news stories may occur regardless of the actual value of the stock.

The headline effect represents another theory related to media effect, and is based on negative news articles. If a company or certain segment of the economy receives negative press coverage, it might affect the way consumers spend and how willing they are to invest. An example of this phenomenon centers on stories about minor hikes in gas prices. Studies show these news articles may compel consumers to reduce spending in other areas.

Social media effect analyzes how news spread via the Internet impacts stock prices and trading activity. One study looked at social media sites and blogs to measure the number of times a certain celebrity head of a large corporation was mentioned after he announced an illness. The analysis found a correlation between the social media effect and changes in corporate stock prices.

Media effect and its influence on financial behavior appear to apply internationally. The University of Hong Kong conducted a study in 2009 that revealed when people’s attitudes change, it leads to behavioral changes in financial affairs. By polling 300 investors, the study discovered a connection between investor behavior and media reports to which the study participants had been exposed.

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Discussion Comments

By donasmrs — On Oct 22, 2014

@ysmina-- But why do people do that? Is it herd mentality? Is it paranoia, the desire to act as soon as possible to prevent or reduce losses?

I don't find the media effect surprising, I just find it illogical. One would think that people would be making important decisions like these based on more concrete evidence. But it sounds like many people make their financial decisions based on what the news reporter says.

By ysmina — On Oct 21, 2014

The media effect is hardly surprising. Media effects the way people think about practically every topic. It's natural for it to also have a significant influence on how people view their finances. I think this is normal. It might be a little difficult for economists to account for it when they're trying to figure out why people are selling their shares, etc.

By ZipLine — On Oct 20, 2014

This is a very interesting topic. The one conclusion I have come to after reading it just how much people trust media. Why else would they rely on financial news to make financial decisions? It shows that people believe financial news to be accurate and I'm sure that most of the time it is.

The issue is that if the news is not accurate, or if it's just a prediction by an analyst, people may be making incorrect financial decisions. I also think that media sometimes tend to exaggerate or dramatize events. So certain news items can literally cause people to panic and do something they wouldn't otherwise. It's probably not best to only rely on media reports for financial data. I'm sure there are other sources out there and it's a good idea to cross-check the information.

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