The media being bad arbiters of quality economic advice is nothing new - they have never claimed to be otherwise because they report what they are told. Yet the tone of advocacy the media often takes today, especially in its more popular personality-driven news shows, might lead you to believe they know what they are talking about.
It's an old phenomenon. Dr. Susan Glover, an anthropologist at UC Davis, says public information from both informal and written sources, like newspapers, leads entrepreneurs astray. In a study just published in Human Ecology, Glover used an example how newspaper coverage - she used the term 'propaganda' - shaped the ore foraging strategies of late nineteenth century Colorado silver prospectors.
Why would anyone let the media dictate their economic strategies? It happens. In the dot com boom and bust and the recent recession, any number of people have let a lot of money ride on notions that have primary coverage in the media.
Glover used the Colorado silver rush as a case study to investigate the role of the media and public information in shaping economic strategies, by comparing actual and optimal foraging behaviors (known as central place foraging, or CPF, behaviors) – in this case, of silver prospectors in Gothic, Colorado.
Central Place Foraging (CPF) models are designed to investigate optimal foraging strategies of individuals. CPF models in particular predict that with increasing risk and distance away from a central home base, foragers will require larger rewards.
The data was gathered from the newspapers of the time, since the information in them is a "fossilized" version of what the public would have known and perhaps discussed in more informal sources, such as saloons.
As it turns out, the information in the local newspapers exaggerated ore concentrations and led prospectors to underestimate the actual risk and investment of time and energy they were taking. Because the "payoff" was not worth the risk (part of which was the distance from the town to the mines – not CPF behavior) prospectors ended up over-risking their investment.
In this case, while the media misled the public by appearing to supply accurate information, the media themselves are being misled, the primary reason you shouldn't get your economic advice from people who are interested in news. The media agree.
The deeper lesson learned in this study is, that in an environment where decisions are based on information provided (and presumably manipulated) by others, risk management is practically impossible and has a high potential for failure.
A very extreme case of this is the recent global financial crisis – individuals were underestimating their economic risk (subprime mortgages) based on what media and economic specialists were reporting about the boom in housing and the economy.
And based on the CPF model, they wandered very far away from their home base with the false hope of a bigger payoff or a better life.
Article: Glover SM (2009). Propaganda, public information, and prospecting: explaining the irrational exuberance of central place foragers during a late nineteenth century Colorado silver rush. Human Ecology DOI 10.1007/s10745-009-9270-1