My Annual Rant (Tinkerbell Returns!) – Now in Dialogue Form

Here’s something from yesterday’s NY Times:

“Stocks Rise as Investors Await Signals”
By Julia Werdigier and Bettina Wassener

Stocks rose Tuesday, many for a second straight day, even after a report showed new-home sales in the United States fell in July more than expected. On Wall Street, the Standard & Poor’s 500-stock index gained 11.07 points, or 1 percent, to 1,134.89 points, and the Dow Jones industrial average added 105.81 points, or 1 percent, to 10,958.35. . . . Stock markets in Europe and the Asia-Pacific region also mainly rose as investors awaited the Federal Reserve’s annual symposium later this week in Jackson Hole, Wyo. . . .

The number of Americans who bought new homes fell for the fourth straight month in July, according to the Commerce Department report, putting sales on track to finish the year as one of the worst on record.
The price of oil rose 15 cents, to $84.57 a barrel, as some investors bet on a rebound in demand from consumers and that a recovery of output in war-torn Libya could take longer than expected as fighting in the capital continued. . . .

Nothing particularly unusual or noteworthy. Here’s the same story from the Washington Post

“U.S. Stocks Rise as ‘Problem’ Bank List Shrinks; Dollar Declines”
Stephen Kirkland and Rita Nazareth

U.S. stocks rallied, reversing earlier losses, as the government’s list of “problem” banks declined for the first time since 2006 and investors speculated the Federal Reserve will act to spur the economy. Treasuries and the dollar declined. . . .

Every day, in every newspaper in the country and on every financial blog, there’s a sentence or two like these. The market fell because “investors were jittery about the possibility of a Greek default,” or because of “poorer-than-expected numbers from the Labor Department,” or some such; or it rose because of “better-than-expected unemployment numbers,” or a “surge in housing starts,” etc.

It is complete and utter nonsense, without any shred of a relationship to reality. The market rises or falls as a consequence of millions of individual decisions; there were over 5 million trades, with over 1.5 billion shares changing hands, on the NY Stock Exchange alone on the day in question (Aug 22), as on all days. The notion that a couple of reporters could somehow have determined what motivated a significant fraction of those trades — significant enough to move the market — is hilarious, and preposterous. That they did so an hour or so after the market closed is even more hilarious and more preposterous. Investors “speculated that the Federal Reserve will act to spur the economy.” Really!!? And how in heaven’s name do you know that?! Investors think that “recovery of output in war-torn Libya could take longer than expected.” Is that so?! They think that, and they based their trading yesterday on that belief? You determined that how, exactly?

We all know, of course, basically how this works. The reporters call up a bunch of their contacts in the investment industry, and they ask something like: “So, what’s going on in the market today?” Or “Do you think the Fed’s meeting is on investors’ minds?” Or something like that. And they report on whatever they hear that sounds plausible.

But 10 times zero is zero. How do these contacts know what moved the market yesterday? And if they don’t (and can’t possibly) know, adding them all together just piles up the bullshit, it doesn’t turn it into usable compost. Repeating nonsense from others doesn’t make it less nonsensical.

It’s a classic example of post hoc ergo propter hoc reasoning — “after this, therefore because of this” — and we’ve known for only the last 2,500 years or so that it produces bullshit. Let’s see: the market went up yesterday (Fact). Find 2 or 3 things that happened yesterday that seem like they should be important. Make up a story connecting one or the other to the movement in the market. And report it as fact that investors cared enough about whatever you identified to move the market.

OK, OK – maybe you’re right, and it’s often nonsense, just a made-up story . . . but surely sometimes it’s just obvious, no? Like recently – I mean, the markets have tumbled because investors are concerned about the downgrade of US securities by S&P and the fears of instability in Europe, right?

Actually, not right. A plausible story, surely – but there’s a rather substantial ontological gap between plausible and correct. How do we all know that investors are concerned about the downgrade? Because lots of people say they are – it’s all over the news, after all. But see above – 10,000 times zero is also zero. It’s just not evidence relevant to the state of the underlying reality. I don’t know that investors are concerned about the downgrade – how would I know that? Because the market went down?!

I’m not even entirely sure that the information needed here (to determine what caused the market movement) is even knowable at all — complex systems (like markets) being notoriously subject to unpredictable movements caused by insignificant triggering events (the butterfly in Beijing that causes the thunderstorm in Brazil). But even leaving that nice little theoretical problem aside, this desperate need that we all seem to have to explain why things happen the way they do in the world around us is poignant, but should not excuse elementary errors in logic.

Hmm, I see your point. But really, what’s the big deal? So there’s a little piece of nonsense, purporting to be fact, in the newspaper every day. So what? They publish Horoscopes, too, and nobody gets all worked up about that. Give it a rest – newspapers have enough problems these days.

Well, it is a big deal. It’s a big deal because markets (and many other things) are full of what I have called “Tinkerbells.” Tinkerbells are statements that become true solely as a consequence of peoples’ belief that they are true. “The bank is going to fail” is a classic Tinkerbell – if you think it’s true, you’ll take your money out. If everyone thinks it’s true, the bank will, in fact, fail. And even if you think it’s false, if you think that others believe it to be true, you’ll take your money out; and if everyone thinks that everyone else believes it to be true, again, the bank will in fact fail.

Tinkerbells are astonishing phenomena. They raise some pretty profound questions about the philosophy of mind – how can mere belief in the truth of something cause it to actually happen?? It sounds like magic, like a kind of “conjuring” – crossing the boundary between mind and matter, even. You can’t really bend a spoon by mental effort alone – can you? But how then can you “believe” a bank failure into existence?

The point here, though, is that this little piece of newspaper nonsense actually concerns something of real importance. What other investors believe about the market is of critical importance to every investor, because markets are Tinkerbells. If everyone believes that everyone else believes that the market is going to collapse because of Spain’s troubled economy, it will collapse.

So “what investors believe” is a really, really important datum – the last thing, you’d think, you’d want a newspaper to misrepresent and falsify.

So I call on them all to stop, effective immediately.

[UPDATE: Really interesting discussion down there in the Comments … thanks to those who suggested readings about this, or similar, phenomena; some of them sound very interesting and very useful. One point I’d like to respond to: the relationship between what I call Tinkerbells and ‘self-fulfilling prophecies.’ There’s clearly a close relationship, but I don’t think they’re identical phenomena. The former is a sub-category of the latter, distinguished from other ‘self-fulfilling prophecies’ by two things: the central role of ‘belief’ that makes Tinkerbells work, and the importance, for Tinkerbells, of group, aggregated, belief — it’s the belief about what others believe that makes tinkerbells (though not the ordinary SFP) work.