July 07, 2006

Explaining the Unexplainable

DAVID POST, a law professor who writes for The Volokh Conspiracy blog, has put forward an interesting finance question: why the devil do business journalists write stories that attribute the day’s market moves to outside events, even when the impact of said events may prove negligible? Mr Post argues that such stories are silly:

It's complete and utter nonsense. The market did in fact fall yesterday. But how could anyone possibly know that it was due to "concerns about interest rates," or "anxiety about North Korea's missile program"? Hundreds of thousands -- millions -- of individual trading decisions go into determining whether the market goes up or goes down on any given day. I don't get it -- I really don't. Are we really so desperate to believe that we can explain everything that we take some sort of comfort from stories like these?

The comments to Mr Post’s entry are quite extensive, and offer many valid answers to his question. One writer in particular observed that in most cases, the rationales are useless, unless there was some really big news – usually about interest rates – that moved the market.

This was a spot-on observation, and one reason why I wish the various news services would limit offering rationales for why the market moved. That way, when the truly exceptional happened, readers would have no qualms about accepting it. As things stand now, one often sees market jumps or dips attributed to things which are the financial equivalent of lame excuses. That, I think, does one’s readers a disservice, particularly when it has to do with “anxiety” or “worry” about this or that.

The people who move the markets back and forth each day are not the small investors saving for the future, or the retired folks on Main Street, or your neighbors with an affinity for strange ETFs. The people who move the markets are professionals, working for institutional investors and hedge funds. They are very good at what they do. So good, in fact, that they are the last people on Earth to have concerns about anything. Where regular folks see danger, they see opportunity, and they’re not afraid to do what needs done to make a profit.

I mean, really. When you’re dealing with people who’ve figured out how to make money from trading orange juice futures, do you really think they give a flying fig about North Korea firing blanks into the ocean? Only if it makes them money.

Now, that’s not to say I’m unsympathetic to the folks writing the stories. If one looks on the wires, as Mr Post’s commenters note, one can see the market stories change as the day goes on. It’s not easy to write those stories, and a seesawing market can whipsaw the poor writer on deadline.

The stories also aren’t easy to write because of one’s audience. The journalists writing them have to balance writing for their specialist and general audiences. It’s a challenge to make things accessible to the layman yet smart enough for the professional. I think that may partially explain why we see these pat explanations attached to market stories.

Another reason for the pat explanations, as Mr Post’s commenters have noted, is because the present story-writing system doesn’t allow for “non-event events” to have an influence on the market. So even though the market moved due to things best be described as inside baseball, one still gets the North Korea explanation.

Let’s take a look at this state of affairs in depth. Here's a perfectly plausible scenario about a series of events which happen during the last hour of trading:



(1) 3 p.m.: NYSE floor trader Brant Sinclair sparks a sell-off in the United States’ broader markets after CNBC airs footage of him using a mobile phone from 1986. (2) 3:15 p.m. The sell-off deepens as hedge-fund employees in Greenwich, Conn., watch the footage and wonder what the hell happened to their lunch orders anyway. (3) 3:30 p.m. The sell-off hits its nadir as Dave Champlain, Sinclair’s arch-rival, shouts in triumph at Sinclair’s national humiliation. (4) 3:45 p.m. Calvin Murgatroyd, a managing director of trading firm Chinese Wall Zombie Bond LLC, announces to his team that he’s sick of this crap and wants to end the day on a positive note. By 4 p.m., everything is over and done – except for poor CNBC reporter Bob Pisani’s attempts to explain what happened to Maria Bartiromo in a way which causes her to finally ask some decent questions. He will fail.

OK, so that’s a bit farfetched even for Wall Street. Still, you can see the trouble here: even though the market went back and forth, it was due to entirely meaningless minutiae. But the writer still has a deadline.

Perhaps this situation could be remedied if the wire services produced two or more daily market stories, each tailored to a different audience. General readers would still get the basic summary, while specialist readers would get a numbers-heavy deeper analysis. A fine example of the latter product can be found at Investor’s Business Daily (a former employer), which has an excellent markets wrap-up. It is chock full of numbers and keeps news focused on sectors and individual equities. Rightly so.

Posted by Benjamin Kepple at July 7, 2006 06:33 AM | TrackBack
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