Why Fake News Is So Much Worse for Investors

Facebook Inc., Alphabet Inc. (Google) and Twitter Inc. are under scrutiny for the roles each played in Russia's attempt to manipulate the public and disseminate fake news during the 2016 political campaign. All three companies will face congressional questioners about their respective roles in the election-tampering investigation.

Consumers of political news are subject to the same sorts of biases and cognitive errors that affect investors. However, there is a significant difference between these two types of news consumers: Traders have a fast and measurable feedback loop — investment returns — that penalizes those who believe things that are not true. Partisans suffer no tangible losses when they indulge their biases, enduring nothing more than the occasional shock of being proven wrong on Election Day. 

Let's take a real-life example from the investing world — the iPhone 7. Shortly after the September 2016 introduction, stories circulated that initial sales were disappointing, and you could sense that the Apple haters were intent on scoring points. As it turns out, that reporting was off the mark; sales of the iPhone 7 turned out to be great and since then the company's shares have gained more than 50%. The penalty for those inclined to believe this news was an expensive, missed investing opportunity.

Consider also what happens when investors latch onto a positive narrative that turns out to be false. Look no further than the stories at Valeant Pharmaceuticals International Inc. and Theranos Inc., each a costly disaster. Both of these can be traced to well-known but persistent cognitive errors in human behavior.

When partisans believe a storyline that turns out to be false — be it pizzagate, Benghazi or the Russia dossier — the repercussions for them as an individual are virtually meaningless. Sure, the impact on country as a whole may be negative, but the specific cost to the individual is de minimus.

What makes investing so much more satisfying than partisan politics is the presence of that relatively fast and meaningful feedback loop.

This isn't a new thesis for me. I have been exhorting investors to be careful about how they consume news for literally decades now. In 2005, I wrote a warning to traders and investors:

News is hardly new. The vast majority of it is backward-looking, informing you as to what has happened already. Investing is about what is going to happen; what's occurred in the past may be of interest, but it's hardly germane to the investment process. Indeed, by the time the news is "out," it already has been built into the stock price.

I've touched on the subject of having a healthy media diet before. I wish I had been more persuasive, since the amount of useless and misleading news seems to be as high as ever. Perhaps people are immune to calls to remove the junk food from their diets, both figuratively and literally.

And so I once again recommend that savvy citizens and voters apply the same approach to news consumption that smart investors use:

Only follow trusted sources that have a track record. Understand your own biases. Be skeptical. Force yourself to understand opposing views by reading widely. Reduce the amount of buzz and noise in your consumption. Don't read to confirm your own views; find things that challenge your positions.

Investors have a very powerful incentive for not getting taken in by fake or misleading news. The question before us is: How can a society get its citizens to be similarly motivated, even though they lack that same immediate punishment for consuming and acting upon bad information? That is a question I suspect we will be wrestling with for a long time.

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