Investors are subject to the same sorts of biases and cognitive errors that people who consume political news are. However, there is a significant difference between these two types of people when they consume fake news: Investors have a fast and measurable feedback loop, which comes in the form of investment returns, that penalizes those who believe things that are not true. On the other hand, those who are not investing endure nothing more than the occasional shock of being proven wrong.
The iPhone 7 is a great real-world example. Shortly after the September 2016 introduction, stories began to circulated that initial sales of the phone were disappointing. As it turns out, that reporting was an example of bias, untrue, fake news. Sales of the iPhone7 were great and, since that time, the company’s shares have gained more than 50 percent. The penalty for those who were inclined to believe the fake news was an expensive, missed investing opportunity.
Also, consider what happens when investors believe an upbeat fake news story that turns out to be false. Look no further than the stories of Valeant Pharmaceuticals International Inc. and Theranos Inc., each was a costly disaster for 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. – Barry Ritholtz
Sadly, the amount of useless news and misinformation seems to be as high as ever. This poses a danger to the investment community. Investors have a very strong incentive for not getting taken in by fake, misleading news and, as such, must remain vigilant in their pursuit of the truth.