What is the 'Headline Effect'

The term headline effect refers to the effect that negative news in the popular press has on a corporation or an economy. Many economists believe that negative news headlines make consumers more reluctant to spend money.

BREAKING DOWN 'Headline Effect'

Whether it is justified or not, the investing public's reaction to a headline can be very dramatic, such that the public’s reaction to bad news in the headlines can be out-of-proportion when compared with the reaction to good news in the headlines. Therefore, when a government agency or central bank releases an unfavorable economic report, traders, investors and members of the investing public might disproportionately react to that bad news by converting, selling or shorting funds away from the currency that has been affected. While this market reaction is, to some extent, natural and expected, the headline effect can speed up and worsen the severity of the market reaction by bringing bad news to the forefront of the trading publics’ minds.

Research on the Headline Effect

University of Western Australia psychologist and neuroscientist Ullrich Ecker has found that the initial impressions created by media headlines are not easily corrected, even when the news stories themselves contain information that mitigates or contradicts the headlines. Ecker found that news article readers were more likely to retain information that conforms to the ideas presented in the headline, and more likely to forget information that diverges from the headline.

Headline Effect Examples

An example of a headline effect is the media's extensive coverage of the impact of rising gas prices on consumers. Some economists believe that the more attention that is paid to small increases in the price of gasoline, the more likely it is that consumers will be more cautious about spending their discretionary dollars. The headline effect can be regarded as the difference between rationally justifiable decreases in discretionary spending and those that occur as the result of a newsworthy event.

Another example of the headline effect is the effect of the Greek debt crisis on the value of the euro. The economic crisis in Greece has been credited with weakening the euro significantly, in spite of the fact that the Greek economy accounts for only two percent of the eurozone’s overall economic productivity. The public’s reaction to bad news about the Greek economy affected not only the eurozone, but also countries outside the eurozone, such as the United Kingdom, that rely heavily on trade with the eurozone to support their own economies. Some have said that the headline effect could be as drastic as undermining the future of the euro and the European Union itself.

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