Painting financial bull’s-eyes on the nearest news headlines

Why some daily financial headlines make entertaining reading, but most shouldn’t really be taken seriously

There’s a lovely story about this cowboy out in Texas. He paced out a hundred yards from a barn, spun around, and fired six bullets across the wall. Then he jogged back to the barn and painted six targets, positioning the bull’s-eyes directly over each bullet hole.

Another cowboy up on the ridge heard the shots ring out and galloped hard across the plain to see what all the shooting was about. But, when he saw the bullet-holed targets, he decided not to mess with the first cowboy, who was, apparently, an incredibly good shot.

Our brains are constantly on the hunt to link up “causes” and “effects”. Linking events in a cause-effect relationship makes us humans feel we’ve got a grip on all the things going on around us. In fact, neuroscientists have shown that a particular spot in the left hemisphere of the brain lights up at the exact moment our brains pronounce, “This caused that.”

These neurological activations are so swift that they often link two events based on nothing more than coincidence. (That’s where superstitions come from: black cats cause bad luck, crossed fingers cause good luck, etc). This impulse to link two events in a cause-effect relationship, without actual proof that the one caused the other, is called “Magical Thinking”. Like this:

• Stocks Close Lower After Debt Drama
  Blue chips stumbled as Standard & Poor’s downgrade General Motors bonds. The Dow Jones Industrial Average ended down 0.43%.

The journalist who wrote the headline has got all muddled up between coincidence and cause-effect. Market prices are the moment-by-moment result of exchanges between literally billions of people, each busily buying and selling with their own objectives and investment timeframes in mind. Statistically, a 1.4% daily movement (either up or down) falls squarely within the range of randomness for financial markets i.e. a perfectly normal daily variance as a result of all this buying and selling. So any movement less than 1.4% is what scientists call “statistically insignificant”. It’s just random. It’s pointless to try to explain a random result; a bit like trying to explain why a coin landed heads.

Most days, market movements are just random and statistically insignificant. Of course that makes it tough for financial journalists who are trying to earn a living by reporting newsworthy events. Not surprisingly, they like to liven things up by linking boring (statistically insignificant) daily price movements to more interesting events which happened to occur on the same day elsewhere in the world. I collected these kinds of headlines for years. Here are a couple of my favourites:

• Markets surge on news of Saddam’s capture
  S&P 500 up 0.9%

It’s a nonsense headline because, as we now know, any movement under 1.4% is a perfectly normal random market variance, so can’t be explained by a cause-effect connection. (A quick way to check for a true cause-effect relationship is to reverse it: if the “cause” hadn’t happened, then would the “effect” then definitely not have happened either?)

I love this one:

• U.S. hedge fund jitters rattle Asian shares
  Falls in U.S. stocks weighed on Asian markets as investors moved into the safety of government debt on rumours of hedge fund losses. Markets in Hong Kong, Singapore, Taiwan all down by 0.2%.

What a load of gobbledygook. But now that you see how it works, you can have a go at a few yourself. Take an interesting event (involving well known global personalities if you can), add a couple of evocative verbs, and link them up with a daily market movement. Like so:

• UK shares soar 1.1% with Royal Wedding as joyful nation celebrates double balcony kiss

• Nervy markets dip 0.8% as Obama submits his application for annual leave

Watching financial journalists paint bull’s-eyes on daily news events can be a good laugh once you’ve got the hang of it, but there’s really no need to take this kind of cavalier reporting seriously.

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