ANZ Finance blog | Disinformation | McGraw Hill Australia New Zealand

Disinformation: Can it Sweep Investors off their Feet?

Published 6 November 2020

By Dr Peter J Phillips, Associate Professor (Finance & Banking) University of Southern Queensland

Disinformation -- McGraw Hill ANZ Finance Blog -- Australia and New Zealand

It would surprise me if you haven’t heard the word ‘disinformation’ recently. Over the past few years, mainly in political circles, the concept has been revived, not invented. You see, disinformation is far from new. It is a legacy of the Cold War. Indeed, the word ‘disinformation’ appears to have come into the English lexicon from the Russian ‘dezinformatsiya’, which was one of several ‘active measures’ (aktivnyye meropriyatiya) deployed by Soviet Russia and the KGB in particular.

While deception had long been a military strategy, the idea of deceiving one’s opponents by the deliberate design of disinformation was something that reached an art form during the Cold War. East Germany (GDR) even had a Department X tasked with managing disinformation campaigns. Its director, Colonel Rolf Wagenbreth said it all, “Our friends in Moscow call it ‘dezinformatsiya.’ Our enemies in America call it ‘active measures’, and I, dear friends, call it ‘my favourite pastime’”.

Disinformation is distinct from misinformation. The latter is false stories, not deliberately crafted or intended to deceive, while disinformation is deliberately designed to deceive. One of the biggest disinformation campaigns of the Cold War, for example, was the KGB’s attempt to convince a wide audience that the United States had created and spread the AIDS virus. To even come close to accomplishing such an objective requires the sustained and careful production of documents, medical reports, news stories and so forth. It is not simply a matter of ‘starting a rumour’ or spreading a false allegation. We have written about this in our article, “Disinformation Cascades, Espionage & Counter-Intelligence” if you are interested in reading more.

The question here is whether disinformation can affect stock market prices. Of course, the answer is yes, in principle. I certainly think the possibility is greater for small, relatively thinly traded stocks but I have reservations about overstating the potential influence of disinformation on the entire investment community and the entire stock market for any extended period of time. To understand why I have reached this conclusion we have to answer an important question: why do markets work?

"The best way to think of a market is as an information antenna. The people who participate in markets each have little pieces of knowledge about something."

I’ve seen a lot of popular books about why markets fail. There are books about crashes. Panics. Manias. Fads. I rarely see a popular book discussing the much more interesting question as to why markets work at all. How does something that just evolved, without a plan and without anyone overseeing its design, adequately perform its function most of the time? This certainly has to be one of the great wonders of the world. We interact with it every day and never marvel at it. But why do markets work? Our answer leads us to consider what markets are.

The best way to think of a market is as an information antenna. The people who participate in markets each have little pieces of knowledge about something. Retailers might know that it’s harder to get bananas this year. Farmers might know that the weather has been unusually unfavourable to banana growing. Importers might know that it’s almost impossible to source bananas from Costa Rica because of strong demand from Germany. All these little pieces of knowledge are picked up in the radar net of the market and step by step the price of bananas in the supermarket reflects what is happening. The price tells consumers all they need to know and also helps to regulate demand (if the price remained low, bananas would quickly be sold out). All this happens without... and this is super important… anybody managing it. It’s like a path through the sand dunes to the beach. No-one decided to make it. But it’s there. And it’s very handy.

"Information flows like a river. Like a river, it follows a well-worn path. To redirect the flow of information, like an attempt to redirect the flow of a river, is not easy."

Just like the market for bananas or anything else we buy at the supermarket, the market price for stocks and bonds on the financial markets reflects the information that people have about the past, present and future prospects of companies and the economy. To create a disinformation campaign capable of shifting the entire market in one direction or another would be extremely difficult because the disinformation would have to override all of the privately held knowledge of the multitude of market participants. Information flows like a river. Like a river, it follows a well-worn path. To redirect the flow of information, like an attempt to redirect the flow of a river, is not easy. It is a wild river. There are rapids, there is turbulence, there are whirlpools, and offshoots that lead to precipitous drops. Disinformation might sweep some investors down one of these ill-fated paths but I’m not convinced that the mighty river can be deliberately redirected and sweep us all to our doom.

Discussion Question

Do you know about Google’s Ngram Viewer? It allows you to see how many times a particular word has been used in book published over the past 100 years or so. Go to the website, https://books.google.com/ngrams, and put in ‘disinformation’. What do you see and how does this accord with what we said above about the origins of the word and its current use?

Further Reading

Chapters 6 and 7 of the textbook deal with information efficiency. How quickly and how accurately markets reflect the pieces of knowledge that different investors hold is a question that has fascinated researchers for decades. Some of the main ideas are presented in these chapters. We will, of course, reveal more in future posts to this site.