On the social psychology of the stock market: Aggregate attributional effects and the regressiveness of prediction.

Abstract

The expectation that changes will either persist or regress to previous levels depends in large part on whether causal attributions are provided to explain recent changes. If these attributions are provided, then the tendency to make regressive predictions is diminished. It is argued that the news media provide such attributions and so cause aggregate-level changes in the predictions of those who receive these communications and thereby in receivers' subsequent behaviors. Causal attributions by members of the media should be expected to be more frequent and more extreme than those that would be generated by individuals who do not expect to communicate information to others. This aggregate attributional process, whereby one group acts on the attributions provided by another, is illustrated in financial markets. First, this research shows that the financial press explains recent changes in stock prices with good news after price rises and with bad news after price falls. In an experimental study, such news is shown to lead to less regressive predictions. The normative and theoretical implications of the results for economic and psychological processes are discussed.

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