Date posted: October 28, 2007

Market Metaphors

Record oil price leaves bears running for cover. Wall Street rebounds as inflation fears ease. World stocks rally after Fed’s rate cut. Dow Jones flirts with new high.

Financial market commentators like to use metaphors and occasionally witty wordplay to describe market movements. In a fascinating paper researchers from Columbia and Cornell University and UCLA show that the use of such metaphors is not as innocent as it seems. They distinguish between agent metaphors, which describe price trajectories as though they have a will of their own and object metaphors, which describe them as if they were the movements of inanimate objects. Stocks climbing, advancing, rallying and edging higher are examples of agent metaphors. The dollar rebounding or the FTSE dropping, are examples of object metaphors.

Previous experiments by social psychologists suggest that the use of agent metaphors creates a bias towards the expectation that a given trend will continue. Thus, if the Dow Jones is said to advance, people unconsciously tend to expect it to continue advancing, whereas a rebound is just a rebound.

The researchers also hypothesized that if market data are presented in the form of a graph, people are inclined to extrapolate it.

To test these hypotheses the researchers set up a series of experiments whereby groups of participants were asked to predict price movements based on the same data but presented in a different format, graphs or columns and with some brief commentary using agent or object metaphors.

The results confirmed the hypothesis, suggesting that the choice of metaphors and the format in which financial market data are presented influence investor behaviour. The researchers also found that up-movements are more likely to be described with agent metaphors than down-movements and are thus likely to be perpetuated. They note that finance professionals may be less affected by such metaphors than the participants in the study. But with the growing pervasiveness of financial market commentary, media coverage may itself become a market force.

John Authers, writing in the Financial Times has some more, but he gets paid for his column and I don’t.

Michael Morris, Oliver J. Sheldon, Daniel R. Ames and Maia J. Young, Metaphors and the market: Consequences and preconditions of agent and object metaphors in stock market commentary, Organizational Behavior and Human Decision Processes, Vol. 102, 2007, p. 174–92.

Some sample articles from the Journal of Behavioral Finance.