On the Idiocy of Financial Journalism

As a rule, any article that tries to make a profound point, while also having the following sentence—"Derivatives are financial contracts derived from an underlying asset, such as a stock, a financial index or even a mortgage"—has entered the journalism hack zone. If you presume your audience may not understand what a derivative is, it's safe to say your article's claim that some old or obscure insight has some really important implications for the future of economic science, is probably considered via the noob criterion: if I were reasonably intelligent but had no clue about finance, would this sound cool? This vetting process leads to countless redundant articles on behavioral finance, efficient markets, and hubris that people may read and enjoy, but does not increase anyone's understanding of finance.

I was reading Scientific American on the plane, and usually can't stand their smarmy, PC take on everything. In July's issue, they didn't fail me. Their article Science of Economic Bubbles and Busts seemed to uncover

The promise of changing forever our fundamental assumptions about the way entire economies function, [using] a high tech fusing of neuroimaging with behavioral psychology. [The result would show an] economics [that] has begun to provide clues to how individuals, and, aggregated on a larger scale, whole economies may run off track.

OK, do tell!

Great, what are these insights?

• how could markets be 'efficient' if prices can fall so precipitously?
• people buy based on gut feelings (animal spirits)
• people dislike losses more than they appreciate gains
• people use rules of thumb, heuristics such as anchoring on a set of base information (that may be arbitrary), or the whatever is easiest to remember (which may not be more important)
• markets may work like ecosystems, where the most profitable survive

There are several more in this vein. These ideas are true, but they have all been around for at least 30 years. Sure, now we can model fMRI that shows what part of the brain lights up when we lose money, but that has not shown anything other than that there is a biological substrate to human thought, which I don't think anyone ever doubted.

It isn't obvious how these facts are related to some better model of finance, because it's not like thousands of smart people haven't been working with them for decades. Of course, economists are predicting the effects of individuals interacting, and these people have emotions and are not perfect. The problem is most of these 'biases' tend to cancel out or are ambiguous. For example, there are biases of over and under-extrapolation that will explain both mean reversion and momentum.

Some revolution.

Comments

[John Galt:]

This time is different.

Dutch Tulips, South China Sea bubble, Japanese stock market/ Real Estate, The Internet all deserve to be priced to infinity because they will change the world.

Today I see people bid up the price of oil ( because it is finite) and Gold ( because the governmen prints money) irrationally.

Yes, at some point we will run out of oil, and at some point we will have inflation unless the government reverses course, but I believe those are overstated and that at some point you over pay.

Ever talked to a gold bug or an oil bull? There is nothing in the world you could say to them to get them to change their stance and that kind of optimism is dangerous.

You are right, most of the financial print isn't worth the paper it is printed on, there are some very good posters at Seeking Alpha that do a much better job for free.

Jul 02 09:57 AM

[Warm_Paw:]

Smarmy articles are written by people who do too little research and too much procrastination.
Speaking of which, the word extrapolation should have nothing to do with investing. I'm hearing that word alot lately.
If the chicken hadn't stopped to sh!t, it would have made it to the other side of the road.
Oil's being affected by interest rates and the value of the greenback, and is still infinite at this point in time. We'll have baked the earth to pure carbon by the time we run out of oil.
Goldman Sachs is purported to have an oil speculation division, I'd bet that had something to do with $140 oil.
Capitalism, like communism, might work, if it weren't for human behavior.

Jul 02 10:55 PM

[TinyTim:]

I guess Scientific American has gone down hill since I had my subscription years ago. This article is the most superficial of survey articles, to the point of being almost useless. They should stick to hard science anyway, which is what they used to concentrate on exclusively. If I wanted this stuff, I'd pick up Popular Science (if it's even still around).

Economics has so many facets and complexity that it's difficult to quantify. It's like being able to quantify history and being able to predict the future like an Asimov novel. Economists are writing best sellers describing situations and pseudo experiments that dazzle the layman. Yet economics has been evolving for many decades. Part of the problem may be that economics is continually evolving. If economic reality is moving forward faster than the forefront of economic thought, the we're only falling behind.

Jul 03 05:39 PM