DEFINITION of Financial Porn
Financial porn is a slang term used to describe sensationalist reports of financial news and products causing irrational buying that can be detrimental to investors' financial health. Short-term focus by the media on a financial topic can create excitement that does little to help investors make smart, long-term financial decisions, and in many cases clouds investors' decision-making ability.
BREAKING DOWN Financial Porn
Expanded media coverage, specifically the advent of 24-hour cable news networks and the internet and the tools it has provided the financial industry, has led to a large increase in financial porn.
Examples of financial porn include constant advertisements of easy-to-use trading-strategy products that purport to turn minimal investments into small fortunes, media coverage of the latest and greatest sector trends and magazines with front pages that claim to have the next 10-must-own mutual funds of next year. Many of these products and ideas expose investors to great risks posed by both the movement of the market and the risk of fraud.
The term was first coined by Emmy-winning Jane Bryant Quinn who is an American personal-finance writer.
Recognizing financial porn is a fairly simple exercise. It is designed to amplify the excitement for a usually risky security by using seductive language that often promotes a one-sided investment or trading outlook. It often encourages active trading and includes dramatic exaggeration of the facts. For example, a stock that has some promise will marketed as having “explosive growth” or as being the “next Starbucks."
Financial porn most commonly comes in the form of the stock advice dished out on television channels, financial websites, online ads and email advertisements – to name just a few of the most common outlets. The advice encourages small investors to treat their equity investments as short-term gambits.
Problems with Financial Porn
Experts contend that the worst aspect of financial port is that it rarely purports to offer short-term gratification. It is often disguised as promoting long-term gains, as this usually absolves the advertiser from any accountability.
Consumers of financial porn are especially susceptible to what behavioral economists call confirmation bias. They tend to selectively pick up bits of information that confirm their own beliefs. Even if an equity analyst is neutral on a stock, an investor who is bullish on the counter will pick out the positive portion of his report and interpret it as a buy call.
Financial porn becomes even more problematic when it comes from tipsters who are collaborating with operators. Masquerading as equity analysts, these people coax investors to buy obscure penny stocks and small-cap counters with promises of high returns. Investors get seduced by the spectacular rise in the stock price in the past 12-18 months. However, what they don’t realize is that the tipster and operator are conspiring to off-load their shares on them at high prices.