The Tom Sawyer Effect

In this new entry I will try to criticize an effect that happens all the time in media and communications. It´s known as the Tom Sawyer effect and it is always present in the press and in the financial announcement.

What happens?
The stock market’s reaction to the publication of results of companies is often surprising. Good results sometimes lead to a downward reaction on the stock market and vice versa because it was different than expected. The human response to a given, as are the results, is based on the information provided previously. Such behavior is known as "Tom Sawyer effect" this was studied in a Working Paper of the Federal Reserve Bank of Boston and entitled "Tom Sawyer and the Construction of Value. (Art.1)

I will try to explain this with the announcement of results from JP Morgan in the past week. In the article from the Guardian (Art.2) the headlines tells you everything “JP Morgan smashes expectations with $3.6bn profit” the title captures the attention of readers but when you read the whole article, it is well structured and it shows that the reporter does a good job explaining the reason for such benefits.

The New York Times (Art.3) is where the story unfolds more through the use of relevant people in the financial world, giving more objectivity to the story using more formal language and the headline is less flamboyant “JPMorgan Chase Reports Strong Profit of $3.6 Billion”

For the Independent article (Art.4) it is interesting how they see the profits of JP Morgan as an incentive for the Dow Jones to pass over the 10.000 after 12 months. It also seems that investment banking profits could be saving US financial firms from weaknesses elsewhere. In this article, we see more objectivity, because instead of focusing only on JP Morgan it also talks about the financial system, competitors like Goldman Sachs and “one of the main reasons that Wall Street is once again expected to pay boomtime-style bonuses at the end of this year.”

So… the Tom Sawyer effect can be seen in the price of the JP Morgan shares and the increase of the Dow Jones over the 10.000 the day of the announcement of results.




The conclusion is convincing. The assessment we make of the same information varies depending on the expectations that they previously had. Our reactions are different than we expected


Art.1 http://www.bos.frb.org/economic/wp/wp2005/wp0510.pdf
Art.2 http://www.guardian.co.uk/business/2009/oct/14/jp-morgan-beats-profit-forecast
Art.3 http://www.nytimes.com/2009/10/15/business/15bank.html?bl
Art.4 http://www.independent.co.uk/news/business/news/jpmorgan-results-help-dow-power-past-10000-1802782.html