Five Reasons Why Financial News Is Bogus

“The Dow dipped sharply today amid rumors that Britney Spears would get out of rehab a week early.”

Well, why not? It’s about as correct as anything else the financial pundits spew.

One of the functions of feeding a 24/7 news cycle is creating content where no verifiable news exists. Analysis has its place, but that piece of real estate should be very small if the news editors had any sense of shame. Stocks go up, stocks go down. Trading is either heavier or lighter than expected. But the vast majority of those measurable effects are the product of chaos, non-linear dynamics, and random flux. The way these analysts share their 20/20 hindsight is the height of windbaggery, but it is also dangerous in many ways:

1. It divorces causes from effects

   There are very real causes for some of the major trades and influences on a stock market. Unfortunately, many of them exist beneath our observations. External factors that are important but counter-intuitive get no attention.

2. It celebrates causation

   It’s easy to come up with some big news of the day and tie it to an economic outcome. Maybe it’s investors who are jittery about a natural disaster, or news of a political scandal. Anything in the headlines can contribute to the “watercooler effect,” even if the Wall Street stuffed shirts only drink bottled water. These faux explanations have the same predictive value as the winner of the Super Bowl has on the markets.

3. It promotes fear in the marketplace

   As a reporter, I hated those days when the Dow Industrials took a sudden plunge. It meant a newsroom scramble to tell people what to do with their 401-K plans. The people assigned to the story could neither name a single stock on the Dow Industrials, nor how many stocks there were in the index, nor that the “K” stands for Keough. It creates a shark mentality, that if you aren’t actively buying and selling and swimming forward you’ll somehow drown.

4. It promotes a false sense of assurance about our ability to know

   The manner of these presentations is always sure and omniscient. No analyst has ever turned to the camera and said “Beats the hell out of me, Jack.” Since the numbers are mostly arcane, unknowable, or unpredictable, it’s nice to have a tour guide who can make sense of them. It lulls the public to sleep, thinking there are in fact geniuses who can make sense of these things. Things like climate change, for instance.

5. It is non-predictive and useless

   We’ve got much better data on the markets than we do planetary climate. If we’re so damned sure the computer models are on the money (assuming the right observations), why hasn’t the same fuzzy-logic been used to make some egghead dizzyingly wealthy? Because the models stink. They smugly pronounce the whys and wherefores as if they knew it all along that morning. And they did. Pick some significant political event or speech, circle it, and then attribute it at the end of the day to the ______ in the index. (Insert either “rise” or “fall” in the blank.) This is how they write the story before they know the final score. It’s just a matter of reverse engineering.

Intelligence is a measure of your ability to acquire and use knowledge. Wisdom is a measure of your willingness to accept your limits. The financial airwaves are filled with very smart fools — empty heads in tailored suits selling fairy tales to fill the time between commercials.

[tags]Ike Pigott, Occam’s RazR, finance, news, markets, broadcasting, Super Bowl, statistics, chaos, nonlinear dynamics[/tags]