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Media Influence on the Behavior of Investors and Traders

Sep 16, 2008
The media has always had the power to influence behaviors, whether you are talking about investors, ethnic persecution, or potential catastrophic events, the media releases information and the public reacts. However, there is more to investor reaction than whether there is discernable and foretelling information in the news. There are psychological aspects that come into play when traders are looking to determine the media's information as a warning or just fluff.

While there are many psychological stances on loss, any trader who experiences loss or is experiencing a current loss is likely to react within the realm of their personality as well as categorically in line with their own value system. If a loss means that the investor means they are not smart enough for trading, they may hang onto it for an extended period of time to avoid the inevitable for as long as possible. If a loss to an individual trader is just an event without any ego attached to it, changes are pretty good that he or she will just dump the stock, minimize their losses, and move on. These psychological factors play a role in any single investor's response to media coverage and interpretation.

The media does have the power to influence the majority of investors, bad news often leads to a high number of dumped stock and good prices often lead to a high number of profitable sales. These sales then cause a different fluctuation in the market. When you combine the media influence, the personal psychological aspects of any given trader, and the general fluctuation of market conditions, you end up with an interesting scenario governed by expectations of public reaction.

Studies have proven that the media does not have carte blanche over the general trading population. In fact, the media news must be specifically related to a company, as opposed to the general climate of the economic state of affairs, before the general population of traders would be expected to sell and dump. When specific companies are named and projected to head south in the near or immediate future, the stock holders want out immediately. Fluctuation predictions really have much less of an affect on mass dumping. Generally, there is no impact when the media reports a decline in the economic climate overall, nor is there a great response when the media reports that there is a warming economic climate.

The basic psychology behind these results is pretty simple, and a savvy investor can actually learn to profit from media news that helps to prompt a mass dumping. Specific companies are those that the investor chose themselves, they are responsible for their own choices and often the news that they have "made a poor choice" creates a regretful sense of wounded pride in the average trader. Thus, those who chose to invest with the specified company now try to seek out redemption or damage control by dumping the stock. Since any single individual trader has absolutely no power over the market conditions, this becomes less personal, and usually no action is taken.

When the media begins delivering unsettling news to stockholders of specific companies, you have the opportunity to decide whether the company is in a downward spiral that will end on the bottom or if they have simply hit a small slump. In the end, as the majority of traders are unloading this particular stock you may have an open window to follow the golden rule of trading. Buy low and sell high becomes a prime opportunity for those who can recognize that media coverage is just that, and over reaction leads to great opportunities for the emotionally aware investor.
About the Author
If you would like to immensely improve your trading and investing results, check out www.secrets2trading.com
AND for a Limited Time, you will also receive a FREE copy of a limited number of the amazing book "Trading In The Zone" which is jam-packed with daily trading ideas and psychological preparations to instantly improve your trading and investing performance.
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