What is CNN Effect?
The CNN effect is a theory that 24-hour news networks, such as CNN, influence the general political and economic climate. Because media outlets provide ongoing coverage of a particular event or subject matter, the attention of viewers is narrowly focused for potentially prolonged periods of time. This increased attention can affect the market values of companies and sectors that find themselves in focus.
- The CNN effect observed that real-time coverage of breaking news and world events prompts a stronger reaction from investors and consumers than would have happened otherwise.
- The CNN effect can be seen to cause overreactions in the market, but the same constant supply of information may have also helped the markets in many ways.
- Whether the CNN effect is economically helpful or harmful depends on how rationally consumers use the information provided and how true and relevant the information is.
- The CNN effect is a specific instance of a media effect and the cable news channel it is named for has since been eclipsed by the Internet and social media as the key source for real-time information.
Understanding CNN Effect
The CNN effect can cause individuals and organizations to react more aggressively towards the subject matter being examined. For example, regular coverage of turmoil in the banking sector may result in investors withdrawing from bank stocks or even moving their deposits out of banks being mentioned. This in turn would heighten the turmoil, perhaps feeding into the news cycle again and potentially triggering a wider financial crisis.
The effect that media outlets have on consumer and investor behavior has been examined since the CNN effect came to prominence during the 1980s. For example, by focusing on natural disasters, news outlets may influence consumers and investors to react more drastically to what is unfolding. This can manifest as a rush for basic supplies in the region affected and a market sell-off of stocks that have exposure to that region and its infrastructure. While this can be viewed as a criticism, media outlets also shed light on the inner workings of governments and businesses, which may increase accountability.
Economics and the CNN Effect
One of the key assumptions in microeconomic models of competitive markets and theories like the efficient markets hypothesis (EMH), is that all relevant information about market conditions and prices is immediately available at low or zero cost to all market participants. It is generally understood that this is not the case in real world markets.
Information is costly and takes time to obtain, and information asymmetries are both abundant and of economic significance. In this regard, lowering the cost of information and speeding its dissemination has the potential to make markets more efficient to the extent that market participants are rational and cognitively capable of using that information, and that the information is true.
However, this means that the economic impact of the CNN effect could cut both ways. If the news is true, but news consumers are irrational, boundedly rational, or cognitively incapable of using the new information then supplying them with ever greater quantities of information at a faster rate may not improve the quality of their decisions and resulting market outcomes.
If, on the other hand, news consumers are rational, but the information supplied by outlets like CNN is not true then market participants reacting to false signals may obviously lead to poor market outcomes. If news consumers are not rational and the news is not true (or of unknown credibility), then it may not impact the functioning of markets for better or worse, though it could produce disastrous results, and would at best mean that any economic resources used in the production and dissemination of news are essentially wasted (aside from the value to consumers of consuming news as pure entertainment).
CNN Effect Post-Television
The CNN effect is really about the speed at which cable news was able to spread information and how that news seemingly made events far away matter to people that otherwise would not have noticed. Well-informed people prior to cable news would still experience a delay in information as a news story from Asia, for example, took time to appear in the newspaper. This information lag actually helped to prevent stock panics based on international events as there was every reason to believe that the situation had changed since the column was written.
Cable news came along and offered near real-time footage and further compounded this rapid reporting with a large dose of sensationalism. Now a typhoon in Asia could be seen making landfall and North America would react more rapidly to the fears of floods or the perceived severity of power outages and the impact on companies in the region.
However, as fast as cable news is, it has been overtaken by social media. Now cable news channels spend time monitoring the same social media channels that regular people follow because there is a torrent of real-time data from all over the world. The CNN effect—the theory that real-time information and prolonged focus on a particular event has a market impact—is still valid, but it may now be accurate to rename it the Twitter effect, rather than tying it back to a cable news channel. Increasingly, we are in a world of cord-cutters, so cable news is far from the dominant medium.