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Wednesday, June 29, 2005

The Trouble With Market Reporting (via Stumbling and Mumbling)

I'm always amused by financial reporters' explanations of market movements. We have a hard time dealing with the idea that stock price movements are largely unpredictable. So naturally, we look for patterns (whether they're there or not). Chris Dillow at Stumbling and Mumbling seems to share this view. He has some nice thoughts on the matter (emphasis mine):

Explaining market moves are just easy after-the-fact rationalizations. In weak macroeconomic conditions, a market fall will trigger the line: "market falls on economic fears." And a rise will invite: "market rises on interest rate hopes." It's the same macroeconomic story.

There are several clues to this pin-the-tail-on-donkey approach. One of the best is "after". It hints at causality without stating it. Why not say: "market rose today after I missed my bus"?

Paradoxically, of all the explanations the dead trees give for market moves, they never offer two of the most likely ones. You never see the stories: "market rises but it's just random noise." Or "market rises because risk aversion declines
click here for the whole post.

It reminds me of the classic coin flipping example in A Random Walk Down Wall Street. An economist made a chart that started at $50. He then flipped a coin multiple times. Each time it came up heads, he increased the stock's price by $0.01. Each time it came out heads, he decreased the stock's price by $0.01.

When he gave the chart to a technical trader (while telling him it was of a stock), the trader said it was a clear buying signal .

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