Social Media Could Be Making the Market Crash Worse

You've probably heard, thanks to the world of constant media coverage that we live in, that the stock market's not doing so well. If you head to any news site, scroll through your Twitter feed, or if pick up a paper (if people still do that), you'll see plenty of doom and gloom headlines. The media thinks it's performing some sort of public service--informing the people--but it turns out that all the negative coverage, especially as its delivered the Twittersphere, just makes things worse. 

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What people are talking about on Twitter both predicts and affects the stock market. After the market crashed back in 2008, researchers at the Indiana University found the mood on Twitter correlated with the value of the Dow. Analyzing more than 9.8 million tweets from 2.7 million users during 10 months in 2009, the researchers discovered with 87.6 percent accuracy that the mood on Twitter predicted the daily up and down changes of the market three to four days in advance. The study argues the mood isn't just a correlation. Another study by John R. Nofsinger out of Washington State found similar results:

We find that events in the social, political, cultural and economic sphere do have a significant, immediate and highly specific effect on the various dimensions of public mood.We speculate that large scale analyses of mood can provide a solid platform to model collective emotive trends in terms of their predictive value with regards to existing social as well as economic indicators. 

The same logic can be applied to this week's economic downturn. The media is fixated on the economy and the mood is certainly dour. Last month the debt ceiling's will-they or won't-they back and forth dominated news coverage as you can see from the following Pew chart.

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Not only did news organizations obsess over the story, but post-debt agreement, the press took a decidedly negative tone to the economy reports Pew:

One thing that distinguished last week’s economic coverage was the overwhelmingly negative tone to the news that followed the August 2 debt agreement. That included reports of widespread public dissatisfaction with the deal—and the process that produced it—as well as a 513 point plunge in stock prices on August 4. That was followed by the August 5 bombshell that Standard & Poor’s was downgrading the U.S. credit rating for the first time ever.

As the Dow continues to slide, media (including this very site) continue to slap on downer headlines and Tweet them out to the world. Former McGraw Hill Publisher Jeffrey Kames offers an explanation for how and why this attitude has anything to do with the economy:

If you watch the cable networks like hundreds of thousands of people do each day, you will hear the “D” word (Depression) multiple times every day. That certainly does not help one’s psyche, especially if you have already been burned in the market. And who wants to buy a big ticket item if all you hear about is a crashing market and a Depression just around the corner. That has caused at least tens of thousands of people to buy less, invest less, and pull what’s left of their investments out of the market. 

Before media became as instantaneous via the Internet and social media, press hype had less of an effect on markets. Looking back at the dot com bubble of the mid-90s, researchers studied if news organization mood could explain the crash. "The overall effect of media hype on financial returns could explain less than 3 percent of the more than 1,646 percent difference in returns between Internet stocks and non-Internet stocks from Jan. 1, 1997, through March 24, 2000, the day the NASDAQ peaked." With the popularization of Twitter and the proliferation of Internet news, media has changed quite a bit. But maybe we can will an economic turn around with some sunnier headlines.