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Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media

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  • Thomas Schuster

    (Leipzig University)

Abstract

A widely held belief in financial economics suggests that stock prices always adequately reflect all available information. Price movements away from fundamentals are assumed to occur only infrequently, if at all. „False“ prices are supposed to be corrected by the counter-actions of „rational“ investors reestablishing equilibrium. However, empirical evidence of widespread irrationality among investors as well as theoretical insights into the properties of complex systems suggest that this view is too static. In fact, it can be shown that under certain conditions dynamic disequilibria have a considerable probability of being „locked in“. The mass media play no mean role in this: By conditioning trend-following behavior and fostering coordination among large numbers of investors, the media can help bring about such destabilizing moves. Media attention can induce positive feedback by increasing the level of excess noise in the market while decreasing the number of perceived behavioral options. Meta-communication thus generated is a prime source of instability in financial markets.

Suggested Citation

  • Thomas Schuster, 2003. "Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media," Finance 0307014, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0307014
    Note: Type of Document - ; prepared on PC; pages: 36
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0307/0307014.pdf
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    References listed on IDEAS

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    Cited by:

    1. Rendra Suroso, 2004. "Economic Agency Through Modularity Theory," Computational Economics 0405006, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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