Gina Preoteasa sends along this Economist ink about speculative booms, the media, and imperfect information. The focus is on this paper by Susan Glover. The abstract.
Traditionally, models of resource extraction assume individuals act as
if they form strategies based on complete information. In reality,
gathering information about environmental parameters may be costly. An
efficient information gathering strategy is to observe the foraging
behavior of others, termed public information. However, media can
exploit this strategy by appearing to supply accurate information while
actually shaping information to manipulate people to behave in ways
that benefit the media or their clients. Here, I use Central Place
Foraging (CPF) models to investigate how newspaper propaganda shaped
ore foraging strategies of late nineteenth-century Colorado silver
prospectors. Data show that optimistic values of silver ore published
in local newspapers led prospectors to place mines at a much greater
distance than was profitable. Models assuming perfect information
neglect the possibility of misinformation among investors, and may
underestimate the extent and degree of human impacts on areas of
resource extraction.
Here's the Economist's take.
I don't think one has to assume deliberate maleficence on the part of
the press to generate unfortunate outcomes in a world (like ours) where
agents use social learning mechanisms as a short-cut and rather than
doing detailed research. Newspapers during the housing bubble credibly
reported stories about those making a killing in housing, and
television networks put together programmes showing the life of house
"flippers" in a positive light. Amid bubble conditions, even
insufficiently sceptical journalism could serve to amplify the signals
being received by consumers, who are using the information with which
they're presented to make decisions about whether or not to become
involved in this or that activity.
Economic models assuming perfect information were low-hanging fruit models: the easiest to develop and solve. We still use them today because of their simplicity, but also because of their predictive power. But one place that they sorely deviate from reality is in the area of information.
If you haven't read it yet, I strongly recommend Daniel Gilbert's "Stumbling Upon Happiness
," a book where Gilbert examines how people's imaginations are developed. He argues, based upon loads of psychological research, that people's imaginations are influenced by what they have seen and experienced - i.e what they know. That's why, he argues, that the images of the future held in the 1950's looks a lot like the 1950's.
It's also why I don't think that past science fiction predicted the future of gadgets. It's just as likely that science fiction, by changing what people could imagine, caused the development of various products.
But I digress. So the fact that media reports, a major source of information, shape people's imaginations is not surprising. Even if misinformation is not intentional, it's still misinformation that can make a bubble worse. That's also why it's important to consider multiple sources even if we individually tend to come to predictable conclusions.
