Narrating Randomness

Narrating Randomness

Everything happens for a reason…right? If something can’t be explained, it bothers us. When dealing with financial markets, this is a dangerous feeling to have. With millions of investors and traders participating in a pricing game from all over the world, narrowing the cause of a price fluctuation to a singular reason is impossible. That doesn’t stop us from trying, though…

One downside of a 24/7 news cycle and constant access to real-time information, is that our priorities have flipped from meaningful thought, research, and reflection, to instant news and instant satisfaction. It has bred a type of shallow thinking. Living in the moment has taken on a new meaning, and it isn’t a good one.

Being mindful of how information presents itself to us is extremely important. In his book, The Black Swan, renowned scholar Nassim Taleb famously critiqued journalists’ perverse need to attach narratives to random movements in financial markets.

One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: U.S. TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM.

Whenever there is a market move, the news media feel obligated to give the “reason.” Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price (they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: Saddam’s capture (the same Saddam). At 13:31 they issued the next bulletin: U.S. TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.

For those of you thinking the randomness narrative is uncommon, allow me to provide a more recent example. Here are the headlines from the night of September 26 and the day of September 27th, the night and day after the first U.S. presidential debate. I’ve included the approximate change in value of S&P 500 futures contracts at the time of the article’s publication.

Markets declare Hillary Clinton the Winner of First Debate
9/26/2016 11:51pm, S&P 500 +10

“U.S. stock index futures erased losses to trade positive as the debate kicked off. Futures were near session highs as the debate ended, with Dow futures briefly adding more than 100 points.”

US futures turn negative as post-debate rally fades
9/27/2016 9:10am, S&P 500 -0.25

“The press verdict on the first U.S. presidential debate is that Hillary Clinton ‘won’, but Donald Trump didn’t lose badly enough to really reduce the uncertainty.”

Debatable: Stocks Edge Higher Despite No Clinton-Trump Knockouts
9/27/2016 11:02am, S&P 500 +6.5

“Stocks are slightly higher today following last night’s US presidential debate between Hillary Clinton and Donald Trump. But if anyone thought the debate would bring clarity to the election, they have another thing coming.”

The Stock Market Thinks Hillary Clinton Won the Debate
9/27/2016 5:15pm, S&P 500 +12

“Consumer and technology stocks, led gains on Wall Street on Tuesday, while a perceived win by Democrat Hillary Clinton in Monday’s first presidential debate gave broader support to equities.”

In summary, the “market” thought Hillary won, then it thought she didn’t win by enough, then it wasn’t sure, then it thought she won again. Is that a logical way to think about market movements? Of course not.

Constantly bombarding our brain with headlines and stories that aren’t meaningful is a very poor diet for cognitive health. Shane Parish, author of the popular Farnam Street blog recently labeled this junk food for the brain as the cause of something he called “pot-belly ignorance.”

Clickbait media is not a nutritious diet. Most people brush this off and say that it doesn’t matter … that it’s just harmless entertainment.
But it’s not harmless at all. Worse, it’s like cocaine. It causes our brains to light up and feel good. The more of it we consume, the more of it we want. It’s a vicious cycle.

Our brain isn’t stupid. It doesn’t want this crap, so while it’s giving you a mild dopamine rush, there’s also very little to add to your library. Like alcohol, it’s just empty calories. You cannot subsist on a diet of alcohol alone.

Clickbait does not carry much meaning. This is one reason that people re-read an article and don’t remember having read it. Their brains determined it was trash and subsequently got rid of it rather than storing it. And that comes at a high opportunity cost –time is limited, you could have spent it more wisely than on an endless chain of mindless soundbites.

Understand randomness but don’t listen to it. It is a trap that will confuse you and likely to cause costly mistakes!


Tim Brennan

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