Loonies Under Your Bed: Misdirected Attention and the Diluted Value of Stock Market Reports

Lupia, Arthur and Grafstrom, Cassandra and Krupnikov, Yanna and Levine, Adam Seth and MacMillan, William and McGovern, Erin (2007): Loonies Under Your Bed: Misdirected Attention and the Diluted Value of Stock Market Reports.

Abstract

Many people pay attention to media reports of the US stock market’s performance. Using a data-based thought experiment, we cast the market’s recent highs and lows in an unusually unattractive light. The result matters because the economic and political factors that make it relevant are likely to continue. Using research in economics and psychology, we explain why so many investors and media reports are blind to the unattractive interpretation. To mitigate the blindness’ harmful consequences, we propose an alternate way of presenting stock market information. The alternative is easy to implement and can help citizens draw important inferences from the attention they already pay to financial reports. The word “loonies” refers to Canadian dollars, which play a key role in our analysis. Loonies are not causal of any of the key relationships in our analysis, but provide a useful device for making a broader point about key US asset values.

• Item Type: MPRA Paper
• Institution: University of Michigan
• Language: English
• Keywords: stock market; money illusion; fiscal policy; information; learning; exchange rate
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; A - General Economics and Teaching > A2 - Economic Education and Teaching of Economics > A20 - General

References

Bettman, James R., and Pradeep Kakkar. 1977. “Effects of Information Presentation Format on Consumer Acquisition Strategies.” The Journal of Consumer Research (3): 233-240.

Chinn, Menzie D., and Jeffrey Frankel. 2006. “Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?” La Follette School Working Paper No. 2006-001, University of Wisconsin, Madison.

Cohen, Randolph B., Christopher Polk, and Tuomo Vuolteenaho. 2005. “Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis.” Quarterly Journal of Economics 120: 639-668.

DellaVigna, Stefano, and Joshua M. Pollet. 2006. “Attention, Demographics and the Stock Market.” Unpublished manuscript.

Dodge, David. 2002. “The Interaction between Monetary and Fiscal Policies.” Canadian Public Policy 28 (2): 187-201.

The Economist. 2004. “The Future of the Dollar: The Passing of the Buck.” December 2. http://www.economist.com/finance/displayStory.cfm?story_id=3445928

Einhorn, Hillel J., and Robin M. Hogarth. 1981. “Behavioral Decision Theory: Processes of Judgment and Choice.” Annual Review of Psychology 32: 53-88.

Ferguson, Roger W. Jr. 2005. “Remarks by Vice Chairman Roger W. Ferguson, Jr. to the Economics Club of the University of North Carolina at Chapel Hill, Chapel Hill, North Carolina.” April 20, 2005. http://www.federalreserve.gov/boarddocs/Speeches/2005/20050420/default.htm.

Fisher, Irving. 1928. The Money Illusion. New York: Adelphi.

Gabaix, Xavier, David Laibson, Guillermo Moloche and Stephen Weinberg. 2006. “Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model.” The American Economic Review 96: 1043-1068.

Greenspan, Alan. 2005. “Remarks by Chairman Alan Greenspan before the Banco de Mexico’s 80th Anniversary International Conference, Mexico City.” November 14, 2005. Available via: http://www.federalreserve.gov/boarddocs/speeches/2005/20051114/default.htm).

Hacker, Jacob S. 2006. The Great Risk Shift: The Assault on American Jobs, Families, Health Care and Retirement – And How You Can Fight Back. New York: Oxford University Press.

Hirshleifer, David, and Siew Hong Teoh. 2003. “Limited Attention, Information Disclosure, and Financial Reporting.” Journal of Accounting and Economics 36: 337-386.

Jarvenpaa, Sirkka L. 1989 “The Effect of Task Demands and Graphical Format on Information Processing Strategies.” Management Science (35): 285-303.

Lurie, Nicholas H., and Charlotte Mason. 2007 “Visual Representation: Implications for Decision Making.” Journal of Marketing 71: 160-177.

Medin, Douglas L., Robert L. Goldstone, and Dedre Gentner. 1993. “Respects for Similarity.” Psychological Review 2: 254-278.

Modigliani, Franco, and Richard Cohn. 1979. “Inflation, Rational Valuation, and the Market,” Financial Analysts Journal 35: 24–44.

Most, Steven B., Brian J. Scholl, Erin R. Clifford, Daniel J. Simons. 2002. “What You See Is What You Set: Sustained Inattentional Blindness and the Capture of Awareness.” Psychological Review 112 (1): 217-242.

Norris, Floyd. 2006. “Dow Set a Record in Height, but Weight had a lot to do with That.” New York Times, October 7, Section C, page 3.

Poterba, James, Joshua Rauh, Steven Venti, and David Wise. 2006. “Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth.” National Bureau of Economic Research Working Paper 12597.

Sausgruber, Rupert, and Jean-Robert Tyran. 2005. “Testing the Mill Hypothesis of Fiscal Illusion.” Public Choice 122 (1): 39-68.

Shafir, Eldar, Peter Diamond, and Amos Tversky. 1997. “Money Illusion.” The Quarterly Journal of Economics 112: 341-374.

Shiller, Robert J. 2001. “Exuberant Reporting: Media and Misinformation in the Markets.” Harvard International Review 23: 60-65.

Simon, Herbert. 1955. “A Behavioral Model of Rational Choice.” Quarterly Journal of Economics 69: 99-118.

Skov, Richard B., and Steven. J. Sherman. 1986. “Information-gathering Processes: Diagnosticity, Hypothesis-confirmatory Strategies, and Perceived Hypothesis Confirmation.” Journal of Experimental Social Psychology 22: 93–121.

Social Security Administration. 2007. “Status of the Social Security and Medicare Programs: A Summary of the 2007 Annual Reports. A Message to the Public.” http://www.ssa.gov/OACT/TRSUM/trsummary.html

Stone, Eric R., J. Frank Yates, and Andrew M. Parker. 1997. “Effects of Numerical and Graphical Displays on Professed Risk-taking Behaviour.” Journal of Experimental Psychology: Applied 3(4): 243-256

Tyran, Jean-Robert. 2007. “Money Illusion and the Market.” Science 317: 1042-1043.

Tversky, Amos. 1977. “Features of Similarity.” Psychological Review 84: 327-352.