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The Good, the Bad and the Ugly

Back in the 60’s, people were thrilling on breathtaking long eye-contact Mexican standoffs. That was the time when no one could visualize the upshot of the good, the bad and the ugly confrontation. A long time passed since one of the greatest Westerns of all times and a more obvious clash of multiple equilibria arose to fulfill the gap that separated the younger generations from those tremendous duels.

In this article, I want to assess the effect of the mass media on determining the outcome on a multiple equilibria framework looking at historical data on stock pricing, financial bubbles and then linking the results to two clear situations where perceptions played a central role defining the outcome.

The motivation for this article departs from Robert Shiller’s statement relating the appearance of the first bubbles with the advent of the newspapers. Furthermore, “Significant market events generally occur only if there is similar thinking among large groups of people, and the news media are essential vehicles for the spread of ideas.” (Shiller, 2015, p.101). One striking example in Portugal was the Banif-TVI case. Despite the unknown expected instability of Banif, it was the news from TVI that triggered the deposit run (Público, 2017). Hence, I will conduct a simple assessment on the influence of the media in guiding towards a particular equilibrium.

The role of the media building expectations

The influence of the media in investors prospects is more widely known when discussing stock prices. Hiroyuki Aman (2013) tested two hypotheses for Japan in this field: a) the mass media is a contribution towards the increase of the basic level of information, meaning their reports should smooth the pricing process and reduce crash frequency; b) the mass media leads to more frequent and large reactions among investors, being harmful to smooth pricing. Evidence is provided on the latter, crash-inducing effect, but a not significant effect on jump-inducing effects.

Would the previous results hold for other occurrences in the financial markets?

Taking a step-closer to the debt crisis, the RR-PP model establishes a situation where three equilibria can take place: a good equilibrium, a bad one and the ugly (debt crisis). The model relates the probability of repayment with the interest rate, given that the investors conjecture a given probability of repayment given a value of the interest rate (RR curve), but the lower the probability of repayment the higher the investors demand to hold debt (PP curve). The important part of this model I want to highlight is the fact that coordination would make possible to move from a bad equilibrium to a good equilibrium. Actually, this hypothesis is put forward in the case of a country owned by one individual creditor. After this 500 words breathtaking long eye-contact, the argument that could solve the standoff is the mass media coverage as a coordination device.

Nevertheless, research has been conducted mostly on the pervasive effects of media. Wisniewski and Lambe (2013) measure the effect of negative journalistic opinions in the abrupt falls in the market value of equity in the banking sector. Figure 1 depicts their initial analysis where they choose three keywords (“credit crunch”, “financial crisis” and “bank failures”) as proxy for negative news on the topic.

F1 23768

Despite the Canadian case where they were able to reverse the situation, the authors verified that the accumulated response to the increasing number of news worsened the sharp fall in value.

So, one can argue that the media play a role, even though the studies and regressions can shortfall in generalization and causality is difficult to be addressed. The next step is to infer how can it be used for to achieve Pareto superior outcomes.

The Good Mario Draghi

The first scenario I will provide is the self-fulfilling crisis in Europe. At the time, rating agencies, mass media, public opinion makers were pressing the less sustainable countries towards successively higher bond yields. In light of the RR-PM model, this translated into a shift from a good equilibrium towards a bad equilibrium. The 2012 Outright Monetary Transactions announcement reversed those pressures and was successful to change investors feelings. Take notice that until 2014 no country requested intervention by the ECB under OMT (Miller and Zhang, 2014), but the effects had clear effects on Spanish and Italian bonds, two of the countries that had increasing burdens (figure 2). Here I postulate the role of news in the transition towards a better outcome. A self-fulfilling crisis can be stopped by an act of belief (Calvo, 1988) and mass media constitute the bigger influence in this field. The introduction of forward guidance practices by the ECB, in 2013, acknowledges the relevance of managing expectations.

F2 23768

The Ugly Greece

By the other hand, other countries faced a tremendous and focused narrative of bad conjectures. Greece was the most severe case of a country that, opposing the solutions presented, was the most affected by negative news. Following Tracy (2012) conclusions, Greek financial crisis was reduced to the alleged shortcomings of a nation and its people. Greece was pushed successively towards a bad equilibrium and further towards a debt crisis. A lot can be to blame to poor country stability and debt control, but as Wisniewski and Lambe (2013) pointed out in their example, the media may have aggravated the situation. Back in those days, and as the competition between newspapers intensifies partially to the successive reduction in media revenues, the eager instinct of journalists to have the best news with the most eye-catching headlines has increased. Greece, with all its fierce opposition to the widely advocated solutions, became an easy target.

The Bad dies after all

The influence of the media in a multiple equilibria context is not easily assessed and the research provided until now give good hints, but a lack of formal proof remains. With this article, I wanted to highlight that the media have a role as coordination device in self-fulfilling crisis, and historical examples give evidence on that. That end of the breathtaking long eye-contact Mexican standoffs can be nudged, the world may increase its robustness to shocks when understanding how to not make life harder during a crisis and actually improve the prospects just by aligning people’s expectations. At last, the use of a simple RR-PP model and various empirical evidences on the effect of news in investors prospects has created a path towards achieving that objective, so that the bad can die after all.

João Matias | 23768  | Master in Economics 2017/2018


Aman, H. (2013). An analysis of the impact of media coverage on stock price crashes and jumps: Evidence from Japan. Pacific-Basin Finance Journal. DOI: 10.1016/j.pacfin.2013.02.003

Miller, M. and Zhang, L. (2014). Saving the euro: self-fulfilling crisis and the “Draghi put”. Retrieved from:

Público. (2017). Diretor da TVI ouvido terça-feira em tribunal sobre notícias da resolução do Banif. Retrieved from:

Shiller, R. (2015). Irrational Exuberance. Princeton University Press. Retrieved from

Wisniewski, Tomasz P. and Lambe, B. (2013). The role of media in credit crunch: The case of the banking sector. Journal of Economic Behavior & Organization. DOI: 10.1016/j.jebo.2011.10.012


Author: studentnovasbe

Master student in Nova Sbe

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