The Economics of Misinformation

By John Farias  

Technology has made information more accessible than ever before. And yet, this same ease of access has also  made us much more susceptible to believing everything we see or read on the internet. This, in conjunction with  our confirmation biases, which drive us toward headlines that affirm our beliefs, has contributed to the rise of  “fake news” and a politically polarized environment. Thus, it is important to maintain a healthy dose of  skepticism by taking every piece of unverified information with a grain of salt. Moreover, the emergence of “fake news” has also proven problematic in issues well beyond the political sphere; from health dangers to national security threats. One way we can assess the consequences of misinformation is through its financial and political repercussions.  

A recent example of damaging misinformation was the claim that the outcome of the 2020 U.S. Presidential  election was illegitimate. For months, President Trump and his allies made weakly supported claims of election fraud, seeking to rile up his base and cast doubt on the election’s outcome before the vote even took place. This  fueled the flames of conspiracy theorists and fringe political movements such as QAnon, who, eager to see  Trump serve another term, were willing to be convinced that Joe Biden and the Democratic Party had stolen the  election. Months later, thousands of President Trump’s supporters traveled to Washington D.C. for a planned “Stop the Steal” rally. The event eventually took a violent turn as some of the attendees stormed the Capitol in an effort to block the electoral college certification. After the dust settled, American taxpayers were left with a bill totaling $519 million. This covered hefty fees from multiple lawsuits as well as repairs and heightened security following the Capitol Riots.  

Just as in the United States, misinformation has had devastating financial impacts internationally. In 2019, a  study by the University of Baltimore and cybersecurity company CHEQ found that the spread of fake news  articles on the internet contributes to about $78 billion in global economic losses a year. The breakdown:  consumers accounted for $17 billion as a result of misinformed financial decisions, $39 billion in stock market  losses, and $9 billion in health-related losses.  

Businesses and corporations alike have suffered from this new reality. In 2019, a social media hoax purporting  the financial collapse of MetroBank spread like wildfire and even fooled media outlets. This prompted a  negative reaction from stockholders which sent shares plummeting by 11%. The same year, a small panic  ensued among investors after a fake letter impersonating Larry Fink, the CEO of BlackRock, duped the media  into reporting that the company would no longer be investing in companies that did not pledge to climate  change initiatives.  

But if misinformation poses such a great threat to the stability and livelihood of society, what motivates entities  to produce and distribute false information in the first place? Apart from personal vendettas and political  motives, there exists a large financial incentive to do so. Advertising allows platforms and publishers to earn  money on whatever content they create and share online, with revenues dependent on the engagement that that  content receives. Since fake news tends to attract a lot of attention, it rakes in tons of clicks. In 2019, the Global  Disinformation Index published a study that analyzed a sample of about 20,000 fake news websites and found  that ad-tech companies, including Amazon and Google, spend about $235 million annually in advertising on  those sites. The proliferation of false information is highly profitable, and therefore, companies have an incentive to continue contributing to its spread.  

As a result, nations around the globe have introduced legislation intended to curb fake news. In the United  States, debate has arisen regarding Section 230 of the Communications Decency Act, which provides legal  immunity to internet companies for third-party content posted on the websites they host. President Trump was a  staunch critic of Section 230 and even pushed to repeal it because it allowed Twitter and other sites to include  fact-check labels on his posts, simultaneously acting as both platform and publisher. President Biden also  emphasized the need to repeal the act, but for a different reason; while advocates of the bill have touted its economic benefits, Biden has argued that social media companies do not do enough to combat misinformation. Firms take a different view. Because the act protects firms from costly legal battles, businesses tend to argue that the legislation fosters innovation, and moreover, has fortified freedom of speech and strengthened the  economy.  

As of now there remains a major responsibility on the part of websites and social media outlets to eliminate fake news and suppress the influence of bad faith actors. We as citizens also have a duty to remain vigilant and understand the impacts of sharing posts that lack credibility due to the devastating damage they can cause.