Behavioral Finance IX. Rumors


Rumors in the financial environment represent quite important topic of behavioral finance. Despite their existence already in the distant past, from the point of view of research, this is a relatively new issue of behavioral finance. Rumors have been present in everyday life since mankind has been able to communicate with each other. Rumors related to finance and economics began to appear simultaneously with the emergence of relevant scientific disciplines and their gradual application in practice. Last but not least, we consider rumors to be an important theoretical area of behavioral finance due to the possibility of applying knowledge to the behavior and decision-making of subjects, as well as to the functioning of financial markets.

According to Schindler, a rumor can occur anywhere and anytime. It is perceived as something mysterious, almost magical. Rumor often creates a hypnotic effect. It fascinates, amazes, ensnares and stirs human minds. Rumors are the oldest mass media in the world and their essence is still difficult to understand. One of the main elements of financial theory is the use of information and execution of decisions based on this information for the allocation of scarce resources. Rumors express a special form of information and their specific characteristics must be taken into account when applying financial theory. Since rumors contain not only financial, but also psychological and sociological elements, it is important to apply an interdisciplinary approach when analyzing rumors in the financial field. 

The characteristics of a rumor according to Schindler are as follows:

  • A rumor is information that has weak verification data. A rumor can be confirmed as true, but also as a lie. An important difference between information and rumor is that information is always confirmed immediately, while rumors are never confirmed at a given moment. They may or may not be confirmed, even after some time.
  • The local or time-limited meaning of a rumor depends on its addressees. The addressees are the people who are confronted with the rumor. Rumors refer to important and significant topics. Out of curiosity, people want to know not only the importance of the rumor, but also need to know the opinion of other people so that they can prepare further reactions accordingly.
  • Rumors are statements intended to be believed, they can be true or false. Some people behave depending on personal beliefs based on them. In this respect, rumors are no different from verified information. The fact that we are supposed to believe rumors distinguishes them from other "informal information" such as gossip, short stories and fairytales. Gossip is meant to amuse people, short stories and fairytales are meant to teach or point out the truth, but rumors insist on being taken seriously.

The table below provides a brief overview of the characteristics and differences between rumors, information and gossip.

Mark Schindler provides in his publication Rumors in financial markets the formula for measuring the intensity of a rumor according to Allport and Postman, that was proposed already in 1946. It contains two basic elements, which are importance and ambiguity. These are mainly involved in the transmission of rumors. The formula looks like this:

R i × a

where R = rumor intensity, i = importance, a = ambiguity. This formula states that the intensity of a rumor in circulation will vary according to its importance to the subject who is confronted with it and the ambiguity of the data related to the topic. The relationship between importance and ambiguity is not additive but multiplicative. If the importance or ambiguity is zero, it is not a rumor.

Since rumors represent a special form of information and the evaluation of information and the impact of new information on the allocation of scarce resources is one of the basic tasks of financial theory, rumors should be analyzed from the financial perspective. Rumors are strongly influenced by psychological and sociological factors. Rumors undoubtedly contain social elements, because without communication they could not be spread. Psychology also plays a role in the creation of rumors, as they can lead to feelings such as fear or anxiety. In such cases, people do not make as rational decisions as in other circumstances. These characteristics predispose rumors to be analyzed by behavioral finance, in which all elements from the mentioned scientific disciplines are covered.

  1. Schindler, M. 2007. Rumors in financial markets: Insights into behavioral finance. West Sussex: John Wiley & Sons, 2007. ISBN 978-0-470-03196-4, 210 s.

  2. Kimmel, A. J. 2004. Rumors and the Financial Marketplace. In: Journal of Behavioral Finance 5 (3), 2004, s. 134 - 141.

    Table: Sumecz, R. 2011. Application of behavioral finance in corporate finance. Banska Bystrica: Ekonomicka fakulta UMB, 2011. (diploma thesis)
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