It has been an extraordinary week in the financial markets of the
world. With the collapse of major international financial institutions,
and governments forced to intervene by propping up ailing insurers or
authorising the merger of banks, newspaper headlines have competed to
convey the scale and significance of the crisis. But there is a
difficult line for newspaper editors and sub-editors to tread between
accurately reflecting the enormity of the market upheavals, and
contributing to the crisis. Should newspapers be censored, or censor
themselves at times of great market sensitivity or do they have a duty
to their readers to speak the truth?
In 1949 sociologist Robert Merton coined the phrase "self-fulfilling prophecy" to describe the phenomenon of a prediction that, by virtue of its effect on behaviour, leads to the prediction coming true. In his book Social theory and Social Structure he gave the example of a fictional bank Cartwright Millingville that is the victim of baseless rumours about its financial solvency. Those rumours lead to a run on the bank by customers desperate to withdraw their savings; this run subsequently causes Cartwright Millingville to collapse.
The self-fulfilling prophecy has been described in numerous areas of life, including education, psychology and medicine as well as the markets. Yet another example was reported in the last couple of days, when rumours of petrol supplies running out in a town in the United States led, in a manner highly reminiscent of Merton’s fictional example, to numerous petrol stations genuinely running out of gas.
Merton’s definition of a self-fulfilling prophecy (SFP) included the idea of a false prediction that is nevertheless fulfilled. However in most situations in which such prophecies apply there may well be some non-zero chance of the outcome occurring – the effect of the prophecy is to magnify that probability.
There are at least two interesting problems that are raised by the SFP. The first is epistemic (the problem of how we can know things). How can we know whether in fact a prophecy would or would not have come true independent of the effect of the prediction? For example, would banks and markets have sustained such heavy falls in the last week if the media had not been reporting so extensively on the "crisis"? In retrospect it is impossible to know whether descriptions of the ailing Lehman brothers were prescient or pernicious.
The second problem is whether the SFP means that certain types of predictions are eschewed or should be eschewed. Concerns about the SFP are cited as one reason why doctors can be reluctant to give bad news to their patients – they are worried about making the patient worse, or contributing to their demise by predicting it. And, according to the New York Times, journalists in the last week have been deliberately avoiding words like ‘crash’, ‘pandemonium’ or ‘apocalypse’. Yet, it could be asked whether such terms might be appropriately used to describe some of the most dramatic events in global financial markets since the collapse of 1929. If journalists (and politicians) deliberately downplay the significance of financial upheavals they may mislead investors (particularly small investors) who could subsequently lose heavily when companies or markets fall.
The only way to avoid self-fulfilling prophecies completely is to avoid making predictions. But the cure may be worse than the disease. Some predictions are important – we want our doctors to tell us the truth about whether and when we will recover from an illness, and we want to know when companies are in trouble so that we can take appropriate action. The important thing is that both doctors and journalists are honest about the nature of uncertainty in their predictions. In this context the CNBC journalists who broke the news of a possible US government bail-out of bad-mortgage loans should be praised for highlighting the limitations of the evidence for their claim – as well as the vested interests of those who were spreading the rumour. Such notes of caution are one way of diminishing the effect of self-fulfilling prophecies, though it may not be enough to prevent it entirely given the sensitivity of markets to rumour and innuendo. The stock market rose 3 per cent in the 30 minutes after that CNBC report.
Perhaps as a form of balance, all journalists reporting financial bed news should conclude their reports with the famous words of warning printed on the front cover of ‘The Hitchhiker’s Guide to the Galaxy’.
It is an interesting idea to say that media should be censored, or censor itself, in times of great crisis. A dangerous one, in the instance the first, as it means whoever is responsible for the censorship is, by virtue of its role, determining the definition of “great crisis”, and history has shown that it is invariably defined to include more and more situations in which the censoring agency, or its preferred ideology and ethics, are being criticised.
It is also particularly interesting in both cases, censorship or self-censorship, as it implies that the media should take responsibility for the effects of its words. Whilst it might be true that people and organisations should take responisibility for consequences of their actions, if these consequences are actions by other, supposedly free-willed, people, can they really be held responsible? How far does this chain propagate?
If a media report causes a bunch of people to dump stock for instance, forcing prices to drop even lower, which in turn scares more people into dumping stock, continually worsening the crisis (the very definition of a stock market crash), can we claim the media is directly responsible for the actions of people twice, three, even four times removed? People that never read the original report? Surely if we are claiming that the media are responsible for the original actions triggered, then they must be responsible for every further action along the chain?
This seems a particularly sticky problem, not just legally (which would be a horrific thought), but morally as well. In the end it comes down to whether or not we can hold a person or organisation morally responsible for the actions of another person simply through making inflammatory remarks. In the current world political situation, this question becomes more and more pressing with each passing day. We must remember each time we feel the urge to support censorship that -this- is the view we are promoting.
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