What was going on in investors' minds over the ten days following the earthquake? Of course, there is no rigorous way to find out. We know only that over this period the Kobe earthquake dominated the news, created new and different images of Japan, and may have led to very different impressions about the Japanese economy. Moreover, the quake sparked discussions about the risk of an earthquake centered in Tokyo. Despite the fact that geological evidence suggesting that Tokyo is at risk for a major earthquake was already known, greater attention was now focused on this potential problem.

Even more puzzling than the direct effect of the Kobe earthquake on the domestic Japanese market was its effect on foreign stock markets. On the day that the Nikkei fell 5.6 percent, the FT-SE 100 index in London fell 1.4 percent, the CAC-40 in Paris fell 2.2 percent, and the DAX in Germany fell 1.4 percent. The Brazilian and Argentine stock markets each fell about three percent. But these diverse countries suffered no earthquake damage on this occasion.

The best interpretation of the effects of the Kobe earthquake on the stock markets of the world is that news coverage of the earthquake, and of the accompanying stock market declines, engaged the attention of investors, prompting a cascade of changes that brought to the fore some more pessimistic factors.

Another market reaction to news illustrates how media attention may, through a sequence of events, foster a belief that some news that would normally be considered nonsense and irrelevant by nearly all investors may eventually be taken seriously. A sequence of news stories about Joseph Granville, a flamboyant market forecaster, appears to have caused a couple of major market moves. The only substantive content of these media stories was that Granville was telling his clients to buy or sell, and that Granville himself was influential.

Granville's behavior easily attracted public attention. His investment seminars were bizarre extravaganzas, sometimes featuring a trained chimpanzee who could play Granville's theme song, "The Bagholder's Blues," on a piano. He once showed up at an investment seminar dressed as Moses, wearing a crown and carrying tablets. Granville made extravagant claims about his forecasting ability. He said he could predict earthquakes and once claimed to have predicted six of the past seven major world quakes. He was quoted by Time magazine as saying, "I don't think that I will ever make a serious mistake in the stock market for the rest of my life," and he predicted that he would win the Nobel Prize in economics.

The first Granville episode took place on April 22, 1980. With the news that he had changed his recommendation (from short to long), the Dow rose 30.72 points, or 4.05 percent. This was the biggest increase in the Dow since November 1, 1978, a year and a half earlier. The second episode occurred on January 6, 1981, after Granville's investor service changed from a long recommendation to a short recommendation. The Dow took its biggest dive since October 9, 1979, over a year earlier. There was no other news on either of these occasions that might appear responsible for the market change, and on the second occasion both The Wall Street Journal and Barrons squarely attributed the drop to Granville's recommendation.

Can we be sure that media reporting of Granville and his supposed powers of prognostication caused these changes? Many people wondered if the Granville effect was not just a coincidence that the news media exaggerated. We can be sure that a sequence of news stories about Granville's pronouncements had a cumulative effect on national attention, and that public reactions to his pronouncements and to market declines at the time of his announcements were fundamentally altered by this cascade.

As the main source of public information about the stock market's performance, the media will continue to have a tangible impact on the playing out of significant market events. On a day-to-day basis, a large part of the media's coverage is snake oil. Then, the price level is firmly in the hands of investors with better sources of information. But in media-defined watershed periods, many people look to the media as their advisor of last resort. Market analysts should not underestimate the media's power to shape public attention.