According to a new study, the language of financial analysts and reporters becomes increasingly similar leading up to a stock market bubble. After evaluating 18,000 online articles by the Financial Times, the BBC, and The New York Times, researchers discovered that financial commentary converges as the market overheats. When the bubble bursts, the convergence unravels.
The findings were presented this week at the International Joint Conference on Artificial Intelligence in Barcelona. Mark Keane, Chair of Computer Science in University College Dublin, and Aaron Gerow, an MSc candidate in computer science, used a computer model to plot distributions of words from financial articles published between 2006 and 2010.
The team identified two dynamics: “verb convergence” and “noun convergence” – in which language used by reporters and analysts showed rapidly increasing agreement. Reporters converged on particular terms such as “stocks rose again,” “scaled new heights” and “stocks soared” prior to the 2007 market crash, showing a uniformly positive outlook across all of the news outlets in the study.
Word convergence can be considered a symptom of psychosocial contagions at work. For the last decade or so, several studies have demonstrated that we are influenced (infected) by the emotions, thoughts and behaviors of others without realizing it. Studies of fear and happiness contagions, for example, suggest that humans in groups begin to synchronize with one another as emotion spreads from person to person. An analogy from nature might be a flock of birds on the ground becoming startled and taking flight in a synchronized wave.
It would seem that exuberance among financial reporters has a similar effect, and it’s evidenced in the words they choose. The study also discovered that this effect is found in the events they choose to report on, which narrow as the bubble grows. As a relatively small number of stocks climb, the reporters and analysts tend to fixate on them to the exclusion of other, less dramatic occurrences that could be telling us something important about a coming crash.
Another way to view these findings is, simply, when everyone appears to think things can only get better – watch out.
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