Turned up to eleven: Fair and Balanced

Tuesday, August 06, 2002

Information and Oscillation; A meandering

I have been thinking a lot about information, both in the course of my work, and in thinking about things like politics, the stock market, etc. This came into my mind last week, when I was listening to an old CD of mine, and I got to wondering about where some movie and TV samples interwoven with the lyrics came from. Of course, using Google, it took me about 30 seconds to find out. This got me thinking about how big a change the Internet really has been, and how useful or useless the past as predictor might be as a result. When I was in high school (not that long ago), I don't even know how I would have found the information I was seeking. I am sure it must be written somewhere in a book or magazine, but it would certainly have been much more difficult. More to the point, I probably wouldn't have bothered.

So what? You might ask...Well, I think this points out that information about anything is orders of magnitude more available than it was even a few years ago. Of course, disinformation is equally available. I am pretty sure I read lots of stuff in the 1990's about the importance of "gatekeepers" and "fact-checkers". Every blogger is familiar with the Layneism "Fact-check your ass", but an important facet of that is the elucidation of fact, and the separation of fact from fiction, or, more subtly, fact from spin. Many, many bloggers, reporters, media watchdogs, and other observers have been working on doing just this, but there is, I think, a big problem with the notion that a blogger, or any other single person, can accomplish this devilishly hard separation. Human beings have opinions. Deep insight, no? People cannot help but have an opinion on the rightness or wrongness of an idea. Even people who say they are impartial are usually either of two things 1) apathetic (to that particular issue, not necessarily in general) or 2)lying (to you or to themselves). I have no problem with selective apathy (it is a necessity in this age of information overload), but people who are not interested in a subject are not usually the best information sources. So we all have to become interpreters of information, sorting out for ourselves the spin from the fact? If this is true (and Ithink it mostly is), then we better start thinking about what this means. Simply put, a healthy public in this era must be educated in critical thinking skills. That is, they must be able to identify a factual statement, and separate it from a statement of opinion, in a discourse that consists of an essentially random mixture of the two. There is a major challenge to an already faltering education system here, and I am not sure we are up to it.

Now, what about things like the stock market? Its on everyone's mind, so lets think about what all of this means for the behavior of the markets. I seem to remember reading this sort of thing, although a Google search doesn't bear me out, about how the increased access to information in the markets for the individual investor would increase volatility. I also recall that a lot of people were upset by this analysis, thinking that it meant that individual investors were dumb, and wouldn't invest wisely, but rather would be influenced into buying or selling based on the latest headline. What they were really talking about, it seems to me, was a Driven Damped Oscillator. The diagram on the preceding link, and the accompanying scary equations simply describe a system where a force acts to drive a periodic wave motion (an oscillation), while a damping force acts to reduce the amplitude. If rthe driving force (in the stock market, we can make the analogy that profits are the driving force) stays the same, then a change in the damping force (illustrated in this link) results in a change in the transient oscillation, but an eventual decay to the same steady state. If we interpret the time it takes information to disseminate to be in some way inversely related to the "damping force" (lets call it C, to fit with common engineering notation, such that C is proportional to 1/T), then we expect a reduction in the "dissemination time" to result in an increase in the intensity of volatility, and the duration of the volatility before the market settles to a new steady state.

Does this really make sense? I mean, the stock market is a lot more complicated than a spring (I hope!). Well, yes, but in the aggregate, the stock market (as personified by a major market index like the S&P 500) can be construed as acting as a single entity (the mass), and "market forces" can be aggregated into a single force (or a sum over forces, if you like), pushing the market either up or down. A shift in "market sentiment" could be reflected as the beginning of a new "paradigm" (sorry for all the "scare quotes", but I "can't" seem to "stop" using "them"!). This shift might essentially mean a reset of the intial values of the system, with the mass (the market) being driven (by newly aligned market forces) to some new steady state, with the aforementioned damping conditions leading to a certain amount of volatility.

Of course, now I have outlined a potential hazard of investing and prognosticating based on pre-internet notions, but do I have a solution? Well, I am afraid I don't. On the plus side, if what I am saying is true (and I really don't know), then "buy and hold" should still be a good policy, at least in the aggregate, because the market steady state condition is not dependent on this putative damping force. On the other hand, when companies are heavily dependent on a high stock price to allow them to expand and grow their business, volatility is probably bad, because a low stock price can affect them to the same extent, in the opposite direction. As always, caveat emptor (and please, please don't interpret any of my nutty ramblings as investment advice! If you do, you deserve to lose all your money!!).