Friday, June 1, 2012

Ridiculous Explanations of Market Movements

Next time you are frustrated that the market's direction is being driven solely by events in Greece, consider that your premise may be totally incorrect! Every day, the media seeks to explain why the market moved in the direction it did (e.g. "Market rises on confidence in Euro plan to avert crisis" or "Market falls on Greek contagion concerns"). But does the media really know why the market has moved a certain direction?

No, because it's impossible to know the aggregate motivations of all market participants. And when we don't know what's causing something, a human tendency is to attribute a causal link even where there is no basis for one. That's what the media is doing!

In The Black Swan, Taleb discusses an instance where he actually caught the same media outlet explaining market movements in both directions using the same bit of news:

When Saddam Hussein was captured, Bloomberg News offered the following headline: "US TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM". But a half hour later, Treasuries moved lower. The headline was changed to "US TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS"

Taleb notes that the same event cannot cause both an event and its direct opposite, and yet that's what the media will lead you to believe. (As good as the book was, however, I must admit that I far preferred the movie adaptation. Natalie Portman was absolutely stunning as the personification of a once-in-a-lifetime, catastrophic event.)

So what are some market headlines you may see in the coming months?

Markets Rise; China May Loosen Monetary Policy
Markets Fall; Concerns About Chinese Economy

Markets Rise; Iran Discussions Ease Tension
Markets Fall; Iran Rhetoric Sparks Tension

Markets Rise; Obama Re-election Lowers Uncertainty
Markets Fall; Incumbent Win Bad For Business
Markets Rise; New President Vows To Focus On Jobs
Markets Fall; Romney Win Increases Likelihood Of War

Needless to say, take each day's market headlines with a grain of salt!

1 comment:

Dividends For The Long Run said...

A dose of sanity amidst all of the chickens running around with their heads cut off. Good post. The market has gone through corrections before and will emerge from this one eventually. Maybe a pool should be started on what event will get the most credit from the media when there is a reversal?

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