Asymmetrical Information

I've always said I'm waiting for the day that a guy on CNBC leads off his report on the markets with "The Dow and NASDAQ were down big in heavy trading today and I have no &#^$&#^$ idea why."

For once it would be truth in reporting.

I'm happy to hear that it's not just us non-economists who feel this way. I wonder how economic reporters would perform if they were sequestered for a week, then presented with the past week's news with all market details excised, and asked to predict whether given markets rose or fell on each day and by how much. I'll leave it to someone else to develop a scoring system and wagering rules, but I'd love to watch such a contest. If the items reported as "business news" really don't turn out to have predictive value (and I suspect they don't) when the outcome is unknown, then why should people trust their explanitive value when the outcome is known? "Leading market shamans apparently made several crucial mistakes in their sacred market index dance, angering the market gods to the tune of one-and-a-quarter percent today..."

Ha! I couldn't agree more with what has been said so far. Obviously, there are a multitude of factors that feed the market. Some are bearish, others bullish - the sum of all results in that day's market swing. I guess it just sounds better when they pick one and go with it.

...and if [pick your affiliate] didn't have some story to tell, traders wouldn't know what to tell their portfolio managers, portfolio managers wouldn't know what to tell their clients, and clients wouldn't have any interesting rumors at all to speak of during dinner.

(sarcastic disclaimer: I work in the securities industry)

This is a great point, one I've wondered about myself. Could be this headline is just another example of blinkered thinking in Reuterville. You can score plenty of political points just by headlining stories that make the market out as a deus ex machina force that rallies on news that your political ideology favors, and slumps when the other guy's ideology is ascendent, even in some trivial way.

I like to think of the DOW as just a regular guy. "The DOW opened higher this morning because of a better than average night's sleep." Or "The DOW was lower this morning because of fear of a scheduled dental appointment, but based on a better than expected corned beef sandwich for lunch, the DOW was up in the afternoon." Since the market moves based on widely dispersed information, I always wonder about those who can conveniently ascribe the result to some single thing.

Those specious 'reasons' for market movements seem mostly provided as a form of verbal strutting by the bloviator on-mike.

But from Berkeley in the good ol' days, I remember a close literary parallel told by the dealers in nickel bags - the original story given with each new batch of weed that hit town. How it arrived in the diplomatic pouch from the Rajah of Kafiristan, narrowly survived a car chase across the Bay Bridge, and is the last remaining lid not done up backstage at last night's Grateful Dead performance at the Carousel.

Neither the market movements nor the dope pedigree are nearer the truth than the other.

the market as a whole is hard to ascribe causation to (except blindingly obvious ones, like they just knocked down half of wal street and killed thousands of people and a crapload of traders)

but the business news (even the orange juice numbers) all have points, for the people involved. you just have to ignore the headlines on broad economy/dow reports

as for being able to predict movement based on news... none of the reporters could, cause otherwise, they wouldn't be reporters!

I couldn't agree more.

Reporters need an explanation, so they call up some fund manager, who can't resist the temptation to be quoted, and can't admit he doesn't know why the market moved. So the FM pronounces about housing starts or inflation fears or Al-Qaeda, or whatever. The reporter gets a story, the FM gets publicity, and the reader gets BS.

Might have had something to do with Toys-R-us abandoning Kids-R-us. Bad vibes in retail this close to the holidays.

But on the bright side, as long as newspapers do this, I'll have plenty of good examples of the post hoc fallacy for my econ students.

I'll add my "I agree" to the above chorus of "I agree"'s with a couple of additional points:

1) If you read these kind of reports every day, you'll notice that there are "default" reasons ready & waiting, in the absence of any news to quote. Examples include "profit-taking", "continued concerns over the economy", and "the jobless recovery."

2) The same phenomenon can occasionally surface within a given security. Every so often, you read something like "ABCD beat Wall Street estimates today and said the future looks brighter than ever. The stock fell 2% on the news." Call me crazy, but the stock didn't fall 2% on *that* news. There must have been something else going on, no?

3) Another "the internet has changed everything" entry: when the market is swinging from big negative to big positive (or vice versa) on a given day, go check out one of the finance sites (Yahoo, SmartMoney, etc.) Every so often you can find a single page where the article will explain that the markets are falling today due to new terrorism concerns, but the market is actually up for the day.

What fun...

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