{"id":2265,"date":"2010-11-09T11:15:53","date_gmt":"2010-11-09T16:15:53","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=2265"},"modified":"2018-08-17T09:09:37","modified_gmt":"2018-08-17T13:09:37","slug":"dont-anthropomorphize-markets","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2010\/11\/09\/dont-anthropomorphize-markets\/","title":{"rendered":"Don’t anthropomorphize markets"},"content":{"rendered":"

For today’s post I wanted to decry a financial markets press tactic that is as old as the markets themselves.\u00a0 Namely, the media love to anthropomorphize markets, especially the stock market.\u00a0 In other words, this is the tendency of reporters to ascribe human behavior to the price gyrations of stocks.<\/span><\/p>\n

Here is an example from today’s Wall Street Journal:<\/span><\/p>\n

“U.S. stocks wavered as investors continued to trade cautiously following last week’s rally…”<\/span><\/p>\n

This kind of reporting is so common that it isn’t even questioned.\u00a0 But why is it incorrect to do this?\u00a0 The reason is that each day the “market” is simply the movement in an index of stocks.\u00a0 Those indices are an artificial mechanism designed to create the appearance of singular cohesion.\u00a0 We follow stock indexes because they aggregate into a single number, up or down, what stocks have done during a day.\u00a0 Yet, that index is typically made up of hundreds of individual components, each of which had a unique trading pattern for the day.\u00a0 In fact, each stock’s investors have their own personal reasons for trading that day.\u00a0 Maybe it is in response to good news or bad news.\u00a0 Maybe it’s because they are financing the purchase of a new car.\u00a0 Maybe it’s because they are trying to lock in a loss for tax purposes.\u00a0 Maybe it’s because their best friend recommended that they buy.\u00a0 And so forth.\u00a0 The index then destroys each of these individual stories into a solitary number.\u00a0 Then the journalists are let loose with their adjectives and their tendency to try and make human the movement of the index.<\/span><\/p>\n

Yet, by ascribing human characteristics to a mathematical construct we actually obscure meaning, rather than lend meaning to the movement.\u00a0 The reason is that we then create a narrative for the human-like index.\u00a0 That narrative frequently takes on mythological or fairy-tale like qualities.\u00a0 During a bubble or a bubble-burst we hear stories of the hopes and fears of “The Market.”\u00a0 Then we forget to do our analysis as we buy into a story about the market, as opposed to believing in our own analysis and reasons for investing.<\/span><\/p>\n

The other reason I decry the anthropomorphizing of the financial markets is because it creates the illusion that absolutely everyone is trading at a given moment.\u00a0 Go back up to that WSJ quote from today.\u00a0 Who are the “investors” it refers to?\u00a0 The implication is that everyone who considers themselves an investor is trading cautiously.\u00a0 Yet, during the dot.com era I had an intern of mine (hello Matthew Schildt!) do a piece of fascinating research using stats available from Yahoo! Finance.\u00a0 He captured in a single spreadsheet all of the components of the Standard & Poors 500 Index.\u00a0 Then he looked at the total shares of stock outstanding for each company.\u00a0 The total of those shares is the total number of possible shares that could be traded on the S&P 500 each day.\u00a0 Then he tracked trading volumes over many weeks (or months, I can’t remember).\u00a0 Our goal was to see just what it meant when “the market” was trading.\u00a0 So what percentage of “investors” do you think were trading on a daily basis back in the dot.com era on its heaviest trading days?\u00a0 5%?\u00a0 10%?\u00a0 What percentage of investors were trading?<\/span><\/p>\n

The number turned out to be 0.7%!\u00a0 Everyone who has heard this number was shocked.\u00a0 That is such a paltry number.\u00a0 So when you hear a Wall Street Journal or CNBC statement of, “Today investors bought into a strengthening market,” or something similar.\u00a0 Remember, investors means just those people who are motivated to buy or sell today.\u00a0 Then remember that markets don’t strengthen as a singular entity – the market is an artificial mathematical construct whose creation aggregates\/destroys the singular and unique reasons for why most investors bought or sold on a given day.<\/span><\/p>\n

Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

For today’s post I wanted to decry a financial markets press tactic that is as old as the markets themselves.\u00a0 Namely, the media love to anthropomorphize markets, especially the stock market.\u00a0 In other words, this is the tendency of reporters to ascribe human behavior to the price gyrations of stocks. Here is an example from […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[12,3],"tags":[],"class_list":["post-2265","post","type-post","status-publish","format-standard","hentry","category-best-of-the-blog","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2265","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=2265"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2265\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=2265"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=2265"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=2265"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}