False rumours can cause real damage to individuals and institutions, and they can harm the economy, writes Cass Sunstein in ‘On Rumours’ (www.landmarkonthenet.com). “If it is rumoured that a company is about to fail, stockholders might well be frightened, and they might sell. Because of the rumour, the company might be seriously harmed. Rumours can and do affect the stock market itself, even if they are baseless,” he adds. Worryingly, rumours can fuel speculative bubbles, greatly inflating prices.
It should not be entirely surprising, the author notes, that the US Securities and Exchange Commission (SEC) has taken a keen interest in the pernicious effects of false rumours, and that New York has made it a crime to circulate false rumours about the financial status of banks.
Similar moves have been made across the globe. For instance, the Australian Securities and Investment Commission (www.asic.gov.au) actively monitors ‘rumourtrage’ and encourages companies and market participants to report the spreading of false or misleading rumours, and other instances of market misconduct. False market rumours are unsubstantiated speculation, and these can in some cases lead to a false market, or be associated with market manipulation and other misconduct, the site defines.
In March 2008, ASIC formed Project Mint following concerns that there was an increase in false rumours associated with short selling. (The project has been quietly shelved but the corporate regulator says it is always looking for examples of the dark art, informs www.smh.com.au in an article dated April 16.)
Closer home, the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992, speak of brokers’ code of conduct. Accordingly, “a stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.”
To lovers of etymology, here is some interesting material from www.etymonline.com: the word is traced to “late 14c., from Old French rumour ‘widespread noise or report’ (French rumeur), from Latin rumorem (nom. rumor) ‘noise, clamour, common talk, rumour,’ related to ravus ‘hoarse.’ The verb is recorded from 1858 in the sense ‘spread a rumour.’ Rumour mill is from 1973.”
Why do we believe rumours?
The key questions that Sunstein explores are: Why do ordinary human beings accept rumours, even false, destructive, and bizarre ones? And what can we do to protect ourselves against the harmful effects of false rumours?
When people believe rumours, the believers are often perfectly rational, in the sense that their belief is quite sensible in light of their existing knowledge, the author explains. “Most of our knowledge is at best indirect about other people, other nations, other cultures, other religions… Lacking personal knowledge, we tend to think that where there is smoke, there is fire – or that a rumour would not have spread unless it was at least partly true. Perhaps the truth is even worse than the rumour.”
Many of us accept false rumours because of either our fears or our hopes, Sunstein reasons. “Because we fear al-Qaeda, we are inclined to believe that its members are plotting an attack near where we live. Because we hope that our favourite company will prosper, we might believe a rumour that its new product cannot fail and that its prospects are about to soar.”
Two processes behind propagation
How do rumours spread? Through two different but overlapping processes, viz. social cascades and group polarisation, the author answers. Cascades occur, he says, because each of us tends to rely on what other people think and do.
“If most of the people we know believe a rumour we tend to believe it too. Lacking information of our own, we accept the views of others… A cascade occurs when a group of early movers, sometimes called bellwethers, say or do something and other people follow their signal.”
Sunstein cautions that rumours are responsible for many panics, as fear spreads rapidly from one person to another, creating self-fulfilling prophecies. A run on the bank, for example, occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent, as Wikipedia informs. “As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy (or positive feedback): as more people withdraw their deposits, the likelihood of default increases, and this encourages further withdrawals. This can destabilise the bank to the point where it faces bankruptcy.”
Group polarisation, the second process behind rumour propagation, happens when like-minded people get together and they end up thinking a more extreme version of what they thought before they started to talk to one another. “In all likelihood, they will become more committed to that rumour after they have spoken among themselves. Indeed, they may have moved from being tentative believers to being absolutely certain that the rumour is true, even though all they know is what other group members think.”
Antidote to rumours
So, what is the antidote to the risk of rumours? The standard answer is the system of free expression, which allows people access to balanced information and corrections from those who know the truth. But this can be an incomplete corrective, because emotions can get in the way of truth-seeking, the author argues. People do not process information in a neutral way, and their preconceptions affect their reactions, he adds.
When new information gets assimilated in a biased fashion, the result is ‘biased assimilation,’ Sunstein instructs. “Those who have accepted false rumours do not easily give up their beliefs, especially when they have a strong emotional commitment to those beliefs. It can be exceedingly hard to dislodge what people think, even by presenting them with the facts…”
Educative read.
