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Loonies Under Your Bed: Misdirected Attention and the Diluted Value of Stock Market Reports

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  • Lupia, Arthur
  • Grafstrom, Cassandra
  • Krupnikov, Yanna
  • Levine, Adam Seth
  • MacMillan, William
  • McGovern, Erin

Abstract

Many people pay attention to media reports of the US stock market’s performance. Using a data-based thought experiment, we cast the market’s recent highs and lows in an unusually unattractive light. The result matters because the economic and political factors that make it relevant are likely to continue. Using research in economics and psychology, we explain why so many investors and media reports are blind to the unattractive interpretation. To mitigate the blindness’ harmful consequences, we propose an alternate way of presenting stock market information. The alternative is easy to implement and can help citizens draw important inferences from the attention they already pay to financial reports. The word “loonies” refers to Canadian dollars, which play a key role in our analysis. Loonies are not causal of any of the key relationships in our analysis, but provide a useful device for making a broader point about key US asset values.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4912.

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Date of creation: 13 Sep 2007
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Handle: RePEc:pra:mprapa:4912

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Keywords: stock market; money illusion; fiscal policy; information; learning; exchange rate;

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  1. Sirkka L. Jarvenpaa, 1989. "The Effect of Task Demands and Graphical Format on Information Processing Strategies," Management Science, INFORMS, INFORMS, vol. 35(3), pages 285-303, March.
  2. Poterba, James & Rauh, Joshua & Venti, Steven & Wise, David, 2007. "Defined contribution plans, defined benefit plans, and the accumulation of retirement wealth," Journal of Public Economics, Elsevier, Elsevier, vol. 91(10), pages 2062-2086, November.
  3. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," NBER Working Papers 11018, National Bureau of Economic Research, Inc.
  4. Chinn, Menzie David & Frankel, Jeffrey A., 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," Center for Global, International and Regional Studies, Working Paper Series, Center for Global, International and Regional Studies, UC Santa Cruz qt6p4215w1, Center for Global, International and Regional Studies, UC Santa Cruz.
  5. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, Springer, vol. 122(1), pages 39-68, January.
  6. David Dodge, 2002. "The Interaction Between Monetary and Fiscal Policies," Canadian Public Policy, University of Toronto Press, University of Toronto Press, vol. 28(2), pages 187-201, June.
  7. Stefano DellaVigna & Joshua M. Pollet, 2005. "Attention, Demographics, and the Stock Market," NBER Working Papers 11211, National Bureau of Economic Research, Inc.
  8. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, American Economic Association, vol. 96(4), pages 1043-1068, September.
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