Social Influences in the Stock Market Essay Example | Topics and Well Written Essays - 750 words

Social Influences in the Stock Market - Essay poserKenrick and Simpson (1997) maintain that ...in the stock merchandise, communitys investment decisions are determined, not by the actual value of a resource but by the perceived value (p. 36). at once an investor moves from pure economic analysis into the area of perception, social influence becomes a key influence. By using acuity rather than data, the investor draws upon the elements that make up the perception, whether real or not. Those perceptive elements are usually socially-derived and filtered through the individuals own bias. The investment decision is then no longer about objective fact, it is about the individuals intrinsic opinion-right or wrong.The prices of securities themselves are often a function of this process. In the stock market, pricing is set by the markets consensus opinion of a companys underlying value. If more people have a good opinion of a stocks worth or potential, they will pay more for it. If the majority, however, have a negative view on a security, that outlook will express itself as a lower price. The obvious social influence here is that many of the people who are set the price are making decisions based on their unique view of the company, market, or economy. This perception is certainly not always accurate. Shefrin states it like this, People send off errors in the course of making decisions and these errors cause the prices of securities to be different from what they would have been in an error-free environment (2002 p. 6). If the majority of investors in ABC Company are influenced by an erroneous social perception, e.g., the company is not environmentally responsible, they will make their investment decisions accordingly and the price of the stock will fall. ABC Company may or may not be an industrial polluter but if the market perceives that they are, the result is negative. In this case, perception is reality.A dramatic example of this innovate is demonstrated by observing the impact of the media on market events. For example, in October 1987, the United States stock market crashed with a resulting massive loss in equity. In trying to understand the reasons behind the event, economist Robert Shiller sent questionnaires to active traders. What he discovered from the response was that the investors were responding to the news of the crisis, not necessarily the underlying fundamentals of the market itself (Brehm, 2005, n.p.). That day, the price movements in the market were not triggered by any objective economic information prices were dropping because of mass investor response to the news that prices were dropping. Shiller (2000) articulates this concept truly well when he observes that, while the media may represent that they are independent ...observers of market events, they are themselves an integral part of these events. Significant market events...occur only if at that place is similar thinking among large groups of people, and th e news media are essential vehicles for the spread of ideas (p. 71). Within the context of the modern information age given the pervasive front man of journalists reporting, pundits opining, and bloggers ranting, it is easy to infer the significant social influence wielded upon the financial markets by the media.Stock