New research suggests banning investment advice in the media

Many financial planners have long advised their clients to pay less attention to the media to avoid making investment mistakes, and new academic research is backing their counsel. In fact, the study goes further to say it may be a good idea to ban public investment advice altogether. The research showed that even when people know the quality of the information being disseminated is low, the “noise” of it being publicly broadcast causes investors to lend it more weight than they should, according to the research paper this summer by Don Dale of the Kellogg School of Management at Northwestern University and economist John Morgan of the Haas School of Business at the University of California at Berkeley. As a result of the barrage of media reports, investors tend to follow what's popular, and that can lead to distorted market prices that are not based on company fundamentals. “The 'echo chamber' effect of public information can ruin the way the market should function,” Mr. Morgan said. (More: Strategies for dealing with irrational clients) Society might even be better off if the release of such information publicly was illegal, the researchers said. Financial advisers regularly say that part of their job is to quell emotions that get whipped up by financial media that covers moment-to-moment moves of the stock market. Darlene Murphy, president of Wellesley Investment Advisors, said during a period of market volatility earlier this year she counseled her clients “to stay away from CNBC." Previous studies that looked at coverage of the subprime crisis showed new information sources like CNBC's “Mad Money” could move investor sentiment and lead to market reactions that suggest less dependence on company fundamentals and more on what information the public was provided through the media.