Is Persuasion In Finanace A Destabilizing Force?

“Our analysis shows that, at a minimum, financial institutions encourage speculation rather than contrarian behavior through their persuasion strategies. If such persuasion works (something we do not show), its effect is to destabilize prices.”

The Must Read Excerpts (Via Harvard)

Over the course of the internet bubble, advertisers tapped into the growth system of beliefs when stock prices were rising, and into the protection system when prices were falling. Evidence on both the use of fund returns in ads and the choice of products being promoted is consistent with the view that firms supply messages which investors are disposed to interpret favorably at the moment.

Abstract (Via Harvard)

Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is an effort to change the listener’s mind using information, with a behavioral model, in which persuasion is an effort to fit the message into the audience’s already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the course of the internet bubble. The evidence on the content of persuasive messages is broadly consistent with the behavioral model of persuasion.

Introduction (Via Harvard)

In most societies, a tremendous amount of resources is devoted to persuasion (McCloskey and Klamer 1995). Selling, advertising, political campaigns, organized religion, law, much of the media, and good parts of education are devoted to getting people to accept certain ideas. The activity of persuasion is not just an expenditure of resources; the content of the message crucially shapes its effectiveness. But what constitutes persuasive content?

Miguel’s Favorite Excerpts (Via Harvard)

In other words, persuasion involves offering information in order to change beliefs. In the behavioral model, in contrast, persuasion does not aim to change existing beliefs. Rather, characteristics of the product are integrated into the prevailing beliefs of the customer using either factual or spurious messages. There are few outright lies, but many more insinuations aimed at harnessing a pre-existing and possibly false belief.

Theory (Via Harvard)

Specifically, we argue that investors hold two broad systems of beliefs about investment: growth and protection (see Figure 1). The former sees investing as a way to get rich; the latter as a way to secure the future. As stock prices rose, investors’ beliefs shifted towards growth; as prices declined beliefs shifted towards protection. The behavioral theory predicts that advertisements should respond to these shifts by catering to the changing sentiments. The traditional theory on the other hand makes predictions based on the usefulness of returns information during booms and busts. We test a variety of specific predictions of the behavioral theory and find they are consistent with the data.

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About Miguel Barbosa

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26. December 2009 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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