By Aoife Doyle
Designated the word of the year in 2017 by dictionary publisher Collins, ‘fake news’ has dominated both media and politics, becoming synonymous with statements from politicians such as Donald Trump in his jousts with US and international press. It is defined as an intentional misrepresentation of reality under the guise of being the truth – an exaggeration or distortion – dressed up as real news. Fake news is not new. For as long as humans have been able to disseminate information, fake news has always been there. Whilst the conversation has spotlighted the implications such information has on politics; many have failed to consider the impact fake news has on the broader economy.
Fake news is not a new phenomenon to financial markets; it has been an issue for a long time. Evidence of falsified information impacting the stock market can be dated back to 1803. A letter claiming an amicable settlement between Britain and France subsequently led to stocks on the London stock exchange rising by 5% before the hoax was realised. Fast forward a few hundred years, and fake news that generates headlines can – and has – hurt a company’s bottom line, pushing the stock price down and triggering a public relations nightmare that is – in many cases – irreversible. Advances in technology and ever-growing access to web-based information has heightened the risk of fake news to investors, companies and global markets. Finance and technology have converged to create Fintech start-ups which are becoming the new growth engines. The rise of platforms that support data fusion from tech, innovators, and customers creates an ecosystem that thrives through AI (Artificial Intelligence) led data. If such data that feeds the ecosystem is flawed – not just accidentally mistaken but intentionally misleading this would shake the very foundations of the financial system. Manipulation of social media impacts AI-driven high-frequency trading algorithms that rely on text to make investment calls. Such algorithms comb through social media to analyse billions of gigabytes of information, gauging market sentiment. These systems have been designed to weed out unreliable sources but are not perfect and can fall victim to fake news just like humans.
Fake news concerning the stock market can be seen on the one hand as misinformed or unreliably sourced, pure opinion on the other. Herein lies the catch: financial markets are loaded with opinion and driven by opinion. Professional and personal investors increasingly obtain financial information from knowledge-sharing platforms on the internet or social media. Potential investors can research stocks, find guidance on investing strategy, receive news instantaneously and discuss market conditions with other like-minded individuals. Financial websites such as Seeking Alpha and The Motley Fool allow members to publish articles with their opinion on stocks and companies where such a view becomes fact. Fake news for investors is information not based on conversations with the management of companies but ideas coming from a financial news blog that allows people to post whatever they desire. Andrew Clare, a professor at Cass Business School, states that ‘fake news stories can distort the efficient allocation of capital across the stock market by attracting unwary investors to fraudulent companies.’ Through social media, fraudsters can spread false or misleading information about a stock or company to large numbers of people with minimum effort and at a relatively low cost.
In 2013 a bogus tweet hailing from the hacked Associated Press Twitter feed claiming that Barak Obama, the President of The United States of America at the time, had been injured in a bomb blast in the White House sent shock waves through global stock markets. The tweet caused the S&P 500 to decline 0.9%, wiping out $130 billion in stock value in a matter of seconds. The ‘flash crash’ resulted from the proliferation of high-frequency trading – using high-powered machines to execute millions of trades per second, each making minuscule profits on each trade. Even though the market recovered virtually instantaneously, the size of the reaction to a single tweet highlighted the vulnerability of the international markets to manipulation through social media. A report published in 2019 by University of Baltimore professor Roberto Cavazos and CHEQ (an AI-driven cybersecurity company) found that fake news costs the stock market $39 billion annually, with as much as 0.5% of the global market’s value being at risk for losses due to fake news.
Not only can fake news impact stocks and the stock market directly, but there is also a global economic price to be paid by businesses and society due to the spread of misinformation. Cyberattacks indirectly targeting the financial sector information systems can attack and manipulate their functions. The spread of misinformation and fake news ranked among the world’s top global risks by the World Economic Forum. The aforementioned report conducted by the University of Baltimore and CHEQ found that online fake news costs the global economy $78 billion. During the 2016 US presidential election campaign, fake news amounted to 6% of all news broadcast, a figure which no doubt rose during the 2020 election campaign. A Princeton-led study estimated that the cost of boosting, advertising and deploying fake news during the campaign would sum to $200 million. The US is not alone in this, with expenditure on politically motivated fake news amounting to $140 million during India’s seven-phase general election in 2019, highlighting the economic consequences of fake news and misinformation across all sectors. The losses to the global economy could be much higher if one were to account for the indirect economic costs. Such expenses include: a decline of trust in mainstream institutions; damage to reputation; and the cost of data protection to avoid the further spread of misinformation.
Many social media platforms have made changes to detect and remove fake news. Facebook uses AI to detect and delete bots, fake accounts and pages spreading misinformation and fake news. The ‘Facebook Papers’, a cache of internal company documents leaked by former Facebook employee Frances Haugen, alleging Facebook prioritised profits over consumer safety – even hiding research results from investors and the public. When Zuckerberg last appeared before Congress, he testified that the company removes 94% of hate speech found on the platform; however, internal documents exposed that the reality is that less than 5% are eliminated. The leak of the papers has exposed the failures of social media companies to protect their platforms and users from fake news effectively. Google has partnered with International Fact-Checking Network to modify its search ranking system and ensure the publication of accurate articles. Twitter has introduced new labels and warning messages to provide additional context and information on Tweets that contain dispute or misleading information. Nevertheless, the Tweets remain on the platform, allowing millions to view the misinformation. News networks are regulated to ensure that information is accurate, and representative of the truth, so social media platforms must be held just as responsible for enabling the spread of fake news.
As well as social media companies implementing strategies to combat and overcome fake news, governments and authorities have passed legislation making provisions for criminal liability for spreading fraudulent claims. The economy already has a degree of protection against the effects of fake news. Nevertheless, existing ‘protections’ are not enough to prevent fake news from infiltrating countries’ economies. In Western societies, the lack of trust in politicians, scholars, media sources precedes the issue of fake news. Increased government presence on social media platforms can help provide credible local content about news and related governmental developments in real-time to its citizens. If governments undertake a proactive approach integrating Internet security, educational citizen communication and media literacy training, and necessary institutional trust-building efforts, they could curb fake news and misinformation.
The economic costs of fake news – straining sectors from health to finance – reflects the broad sweep of the threat. The spread of fake news is heightening across every country and sector in the world. With technological advances, and despite rapid efforts at detection, the risks and costs of fake news continue to influence global economies. Fake news generated black swans may have the power to destroy iconic firms, destabilise financial markets and generate untold economy-wide chaos and harm. Fake news may be foolish, but an investor’s reaction to such misinformation does not have to be.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Image: Google Images