The golden rule of the finance industry dictates that the answer to “Why does it work that way?” is almost certainly “because it benefits Investment Banking.” Analyst price targets – always wrong – are a good example. While retail investors remain incredulous as to how the analyst can keep their jobs, and brokers tell them “they don’t know shit” and smile their smug, condescending old white man smiles, the analyst pockets a check for $400K after the secondary offering their optimism help create.
Research has to remain credible to be of any use, but the goal isn’t to correctly predict performance – they don’t even get paid to be correct on that (not directly anyway). Analysts DO get paid – a lot – for generating banking deals. The only real inexplicable thing is that retail investors keep falling for it. Every time a deal happens – and there’s been some doozies in the energy sector lately – they think “maybe this time, the target’s right and I’ll make a fortune.” They want to believe.
The relationship between politicians, the electorate, and economists is similar. Academic economists froth at the mouth in apoplexy when new economic policy is announced as if the pols’ priority #1 wasn’t getting elected. “More free stuff for you and someone else is paying” and “contribute to my campaign and keep your loopholes” are always going to be the most successful policy initiatives and this has next to nothing to do with economics. Each successful test of our collective gullibility – that someone wants to help – ends with the same answer.
Media’s a bit better but the same dynamic is still in play. Journoland is still valuable – without it Rob Ford would still be mayor and Hillary Clinton’s convenient interpretation of public sector transparency would be unknown. But these useful, investigative stories make up, what? 10% of content? 5?
Legacy media can’t afford to fund many of these prolonged investigative reports now that the classified ad revenue’s gone and Google took most of the rest. Revenue’s so thin that even top commentators need to publish four times a week or join their friends on the unemployment line.
Fox News is still “America’s most trusted news source”, through the judicious pulverizing of the days events into easy to swallow conservative pablum. Just like politicians, pandering seems the most profitable route to success. Advertisers hold their noses and pay up for 30 second spots.
Fox is an easy target but CNBC and the rest of the financial newsosphere are often little better, feeding investors’ base lottery impulses with a steady stream of “hot tips” from expertly-coiffed charlatans when everyone, EVERYONE knows at least 90% of investors should just buy the cheapest possible index ETF and get on with the more important parts of their lives.
There are a lot of ethical people in finance who profit from doing the right thing. There are media stories that are a necessary public good. I’m even willing to accept the theoretical possibility of an honest politician.
But when push come to shove in the daily grind, just follow the money and it’s clear that in each one of these cases there’s ongoing and pervasive bait and switch – a veneer of helpfulness masking bone deep self-interest. For an equity analyst, the premium is not on predicting stock prices but generating high margin banking business. He premium on political rhetoric is winning elections, not getting an A plus from Scott Sumner. The premium on media coverage is “time spent” and advertising revenue.
We’ve been asking the wrong questions.