The dreaded sequestration is upon us! The world is ending! Run away! — and Markets scream higher.

Something appears to be wrong with this picture — and this morning, we are going to discuss which of these two organizations is incorrect.

Let’s begin by noting both of these entities are self organizing collections of humans. Irrationality is built into their essence. We cannot get away from that factor, at least not until the singularity arrives, and humans can have their irrationality (and humanity) programmed out of them. For now, let’s simply admit that this is an inherent function of the breed. It cannot be avoided in organizations of Humans.

Second, consider the motivations (to anthropomorphize this) of each entity. There in lay the clues as to which is more or less rational.

Markets exist as a place where capital, investors and investments intersect in the form of securities. It is where the buying and selling of debt and equity occurs. Those with capital can invest in or lend to those who can put it to better potential long-term use, be they start ups or existing companies or governments.

Media is a business form that creates content, which then attracts an audience. Media then monetizes that primarily by selling access to this audience to its advertisers.

Neither of these entities is any stranger to irrationality. While noth have a profit motive, they each go about pursuing it in very different ways.

At Market tops and bottoms, the collective pricing of its wares becomes absurd. In 1982, stocks traded at an 8 P/E. In 2000, they traded at 32 P/E. On the eve of crisis in October 2007, stocks were priced as if all was fine. In March 2009, stocks were priced as if governments and the Federal Reserve were going to do nothing. History teaches us that the human elements of markets all too regularly spiral into spasms of mass delusion.

Media has a somewhat differing approach to embracing irrationality — with a different level of background foolishness. Hype is the watchword, and the media can take a relatively modest issue and blow it up far beyond reasonable proportions. Think back to Y2K as an example of relentless media silliness and fear mongering. The world was going to come to a stop on December 31st, 1999 when the clocks rolled over. (Nothing happened). This past December, the Fiscal Cliff was going to be yet another disaster. Again, you should have ignored the hype.

And now, we have the sequester. It is front page story, lead item on every TV show. Yes, Sequester is likely to shave at least 0.5% off of our total GDP. It reflects the congenital dysfunction in Washington, DC. I don’t want to suggest this is a good thing — it is, as the comic below suggests, a self-inflicted wound. But it is not all that much of a stretch to read the actions of the market as suggesting its not all that.

With Markets, the irrational behavior is a bug. Smarter, more experienced investors are aware of this all-too-human behavior. It creates opportunities, but is wildly disruptive. When markets become irrational, a majority of its participants suffer. Entire schools of thought have arisen to study irrational behavior of financial actors (i.e., Behavioral Economics and Neurofinance). It is not considered an advantage when markets spiral into their regular fits of irrationality.

With Media, irrational behavior is a feature, not a bug. The goal is to attract a large audience that can be monetized with adverts. Hence, there is an incentive to emphasize the outrageous, the ridiculous, to create buzz and hype. An entire subspecialty dedicated to studying memes and viral events has arisen to capitalize on this. It is considered an advantage when media spirals into their regular fits of hype. From a business perspective, “Irrationality” to organizations that sell audiences to advertisers, is quite a rational behavior.

Washington D.C. is the perfect foil for Media. It creates a a false narrative that plays right into their sweet spot. There are the classic elements of narrative conflict: Great stakes, villains and heroes, dramatic personalities, risk and redemption. As previously discussed, the media narrative about the 2012 presidential election — the horse race that was too close to call — was wildly wrong. But it sold boatloads of papers and advertising.

It also scared some people into them into some poorly considered decisions. Over the years, I have tried to emphasize how dangerous a compelling narrative can be to investors. This is where the media narrative becomes so dangerous.

I don’t want to suggest either is monolithic. Markets consist of buyers and sellers. Media has a spectrum of opinions. Markets produce an investment opinion by the preponderance of actions of its participants. Some press practitioners actually got these things right, and were proven by time to possess insight. But what we are referring to here is the overall actions, the collective impressions each creates.

Between the two entities, which are you more likely to believe — the one whose job it is to match buyers and sellers, or the one who is trying to deliver an audience to advertisers?

 

 

Category: Financial Press, Markets, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Markets or Media: Which is More Irrational?”

  1. mathman says:

    Humanity is irrational to the point of being psychopathic:

    http://www.youtube.com/watch?NR=1&v=j3sgwZXRvxc&feature=endscreen

  2. call me ahab says:

    I am quite happy that “stock prices have reached what looks like a permanently high plateau”

    anywhooo-

    sequestration as chronicled by Bob Woodward, was an Obama idea . . .and now he indicates that “A ‘Very Senior’ White House Person Warned Me I’d ‘Regret’ What I’m Doing

    http://www.businessinsider.com/bob-woodward-obama-sequester-white-house-reporting-price-politics-2013-2

    And we have those saying sequestration is just a bad idea . . .teachers getting pink slips already: a> href = “http://www.washingtonpost.com/blogs/fact-checker/post/4-pinocchios-for-arne-duncans-false-claim-of-pink-slips-for-teachers/2013/02/27/dac86324-8115-11e2-b99e-6baf4ebe42df_blog.html”>4 Pinocchios for Arne Duncan’s false claim of ‘pink slips’ for teachers

    Why can’t we all just get a long (like Rodney King said) and just bang out some sensible socially progressive tax increases . . .that way we can get our government services for free. As an aside- our new Senator here in Virginia, Tim Kaine- is whining about all the cuts to the military- just seems you can’t make some people happy

    ____

    BR: except that your entire narrative is false.

    http://gawker.com/5987586/goodbye-bob

  3. PeterR says:

    Two monks argue about a flag.

    One says, “The flag is moving.”

    The other says, “The wind is moving.”

    The Sixth Patriarch happens to walk by and remarks, “Not the wind, not the flag; mind is moving.”

    Zen Flesh, Zen Bones
    Paul Reps

  4. Moss says:

    It probably comes down to which is more incorrect.

  5. AHodge says:

    since my money is in it
    i find it useful to say the market is never wrong

    just prone to change its mind ” with media “guidance”
    having paid supporters and no consequences–partly the from short attention span– may also make media worse
    as for the latest sequestration “cliff” doom mongering
    led by media bully pulpit in chief
    its grossly exaggerated mostly bogus
    and as i noted from my rudy notes earlier
    it wasnt designed to be bad it was just completely arbitrary across the board
    and good flexibility within each dept can be granted with the budget authorization probably by march 28
    i anint sellin any US not that i own much

  6. ironman says:

    At least the market is more understandable, because it always has to return to a rational basis for its assessments. You can’t say the same for the media….

  7. danm says:

    i dunno…

    The words Fiscal Cliff were all over the place… I don’t see the word sequestration nearly as much… and when I google it, all I get is definitions.

  8. A says:

    Very good points.

    The sad reality is, that once you read the stories, listen to the talking heads, and digest the content, the first question you have to ask yourself is:

    “OK, now what is the truth”

  9. AHodge says:

    as for its impact there are two wildly different metrics you could use
    how valuable is the program you are cutting
    how may jobs and their income and follow on spending will you lose?
    nobody agrees on the first
    no one has –even partially that i know of– done the second with that detail,
    its just straight lost dollars of govt spending cut model by everyone

  10. danm says:

    In the last few cycles, the market only tanked when profits/GDP reached a very low level. Current profits are still quite high… something tells me the equity markets will stay buoyant enough until that profit/GDP ratio shows real weakness… a few more quarters?

    Unless some wheels start falling off quickly… also possible considering the European situation, currency wars…

  11. scottsabol says:

    Barry,

    Great post. I see this quite often working in television.

    Take this one step further: Media hypes certain stories a certain way to fit the cognitive biases of their viewers. Viewers react to the emotion of a story as it fits with their preconceived notions versus–as you say–a solid, data driven narrative (way too boring for viewership) which rarely sells anymore.

    This is a good reason why the media rarely reports on science and real economics or other global events that directly shape our lives in the US. Topical news has now become the youtube clip of the day.

    Regards,

    Scott Sabol

  12. wally says:

    I think that impressions of both the media and the markets have changed significantly since the spread of easy internet access. Second opinions, alternate vies and even raw facts are more available to all.
    The media, particularly, have not come off well in recent years – the light of day has not flattered them.

  13. scottsabol says:

    Barry,

    I see this everyday working in television.

    Take this one step further: The media creates content to fit the cognitive biases/preconceived notions of their viewers. People respond to these hyped stories emotionally not rationally; well told news narratives don’t sell anymore . Media has abandoned sharp, objective journalism in place of this. Welcome to the youtube’ified era.

    Scott

  14. george lomost says:

    All this “Don’t fight the Fed” talk reminds me of George Clemenceau’s concept of ‘cordon sanitaire.’

    By this logic, the Fed has erected a kind of moat between the markets and reality. You and your peers are on the ‘right’ side of the moat and everything is hunky dory. You hide behind the handy narrative of the “irrational” mob on the other side.

    The other side is populated by anger and despair. From my side of the divide we are on a glide path to world-wide serial defaults that will engulf everything. Forget Greece, think Argentina.

    BTW unless you are a creationist the human irrationality meme is nonsense. It is simply incompatible with darwinian evolution. The explanation is as straightforward as it is counterintuitive.

    ~~~
    BR: I see your understanding of evolution is every bit as insightful as your understanding of markets.

    A “negative” trait to investors can easily exist so long as it does not / did not interfere with procreation and the ability to pass genes to progeny.

    Indeed, many of the traits that work agianst you in markets work for you on the African Savannah. Lots of irrational traits exist BECAUSE they worked so well in the wilds for millions of years: Optimism bias, false pattern recognition, herding — work against you in the century or so we have had capital markets.

  15. Greg0658 says:

    may we live in interesting times indeed .. I think the public is learning the hard way (again) what money is for .. to get the public (pawns) out of bed to do something worthwhile for the king and his court .. thing is: if your smart as a kid you can learn one of those trades that lets you be in the court

    of course money also divy’s up real precious materials like oil & corn & keeps us from waste’g them (ya right)

    oh and Rascal Scooters for Everyone (powered by your own backyard wind turbine :-)

  16. Greg0658 says:

    ps – I’m in the camp Y2K didn’t happen because we GOT TO IT – hey whats wrong with paying for a fix before IT happens?

  17. scottsabol says:

    rewrote my post then realized I double posted it…my apologizes

  18. danm says:

    ir·ra·tion·al
    1.
    without the faculty of reason; deprived of reason.
    2.
    without or deprived of normal mental clarity or sound judgment.
    ————–
    Semantics.

    Some take it as a lack of reasoning and others see it as a lack of sound judgement. HUGE difference…

    My brain can be very rational but my judgement can be unsound due to bad input and/or heuristics… but some would think I am irrational despite my being quite rational!

  19. DeDude says:

    Neither gets it right every time, so I tend to look at their “arguments” to see if any of them make any sense at all. A slow 0.5% reduction in GDP is not much in itself (the Bush recession dropped us about 10%). The media is hyping it up to sell adds but there really is not much when you look behind the curtain. Markets may be more right than wrong this time. Although something bad from Europe could make the markets wrong – and markets always seem to “get it” late in the game – so they could also be proven wrong.

  20. faulkner says:

    “Irrational” is a short convenient word for System 1 thinking: automatic, associative (to anything), short-term pattern recognizing and emotional as well. Also known as intuition or fast and frugal mental short cuts. The “ir” in front of the highly respected alternative “rational” makes it sound pejorative instead of another way of thinking.

    Very nice unpacking about how markets and media have different relationships, and goals, to this natural human ability.

  21. hammerandtong2001 says:

    I read something noteworthy in the media (WSJ) a few days ago regarding the “sequester.”

    The columnist/pundit George Will called this whole thing a “panic over pennies” – given the budget cuts required comprise only 2% of Federal spending. And that’s barely enough to dent the rate of growth in spending.

    FWIW.

    .

  22. RW says:

    All systems have a logic: Those we don’t understand can appear irrational as can those whose apparent goals seem inconsistent with their behavior.

    There are some fairly reliable constants though; e.g., a mature system’s logic tends to be strongly preservational, a struggle to maintain status quo; that which fostered its growth and existence is continued as unchanged as possible …until crisis …and reorganization …or recycling.

  23. Petey Wheatstraw says:

    Both are apparently infected with a mutually parasitic need to create a pseudo reality instead of recognizing actual reality.

    Everything is hunkey-dory. Party on, Wayne! Party on, Garth!

    Really.

    REALLY?

  24. [...] On the sequester who should you believe: the media or the markets?  (Big Picture) [...]

  25. kek says:

    Irrational markets are the friend to the long term investor.

    The media by and large has become a freakshow with biases even Barry has never heard of.

    The lesson all investors eventually learn, and it is this: think for yourself.

  26. danm says:

    Who is more rational:

    The one who knows nothing, has the wrong input data but uses linear models to get a solution or the one who has been analyzing data for 40 years, has assimilated the true facts and uses his/her intuition?

  27. [...] Ritholtz at The Big Picture asked whether relative to the sequestration debate whom we should believe: the markets or the [...]

  28. Martin Barry says:

    I wish people would stop using Y2K as an example of scare-mongering. A lot of hard work went into making it such a non-event. The amount of software that was patched and data that was made unambiguous was incredible.

  29. RW says:

    What Martin Barry said.

    More generally there are a number of assertions that identify a person or information source as unreliable and the greater the certainty of the assertion the stronger that inference should become. “Y2K was no big deal” is certainly in that category but so are a number of others, from global warming denial to stop the Fed or America will become Zimbabwe.

    The stronger that certainty is the less worthwhile arguing becomes: At some point you have to figure you’re dealing with a psychotic, a troll or a fool and there is nothing you can say or write that is going to alter that in the slightest.

    It is best not to argue,
    But if you do at all,
    Never do so with a fool.
    A fool can defeat all.

    He does not care for the facts.
    He does not know debate.
    He’s a stranger to reason.
    Logic he can negate.

    In the end the fool will win,
    His logic is so strong!
    Decides what he does not like
    And then it must be wrong!

    It’s better to keep quiet
    When challenged by a fool.
    Else, to prove his own wisdom,
    He will make you a tool.

    It is hence my policy
    To not respond to those
    Who ask questions not to learn
    But to be bellicose.

    -M C Gupta (25 October 2008)

  30. evelyn says:

    I look at a chart of stock market responses to political crises or fed stimulus through the lens of behavioral conditioning. Each crisis appears to have a declining impact on the market, as does each dose of stimulus. We are (apparently) being conditioned to ignore political crises. What happens when the conditioning is complete? How long would we disregard political crises? If they ease off QE exceedingly slowly, indefinitely.

  31. Greg0658 says:

    I’ll have another go at this .. seems the question is to assist in the front-run of the consensus that a SNAP must happen .. admirable because thats your job to save your clients from that hell of a miss

    my job is not that – it is to instill a desire for a new OpSys – even tho thats not what folks think they want at this time

    I may be wrong that cash drivers for the coming centuries are wrong-headed .. people may need that Matrix v.1 vs Matrix v.0 (the near perfect one)

    the SNAP:
    ~folks see that funding stocks empowers the corporate entity so it MAY build out and provide a job
    ~a job is #1 provider of near wealth & happiness in life
    ~folks see that if that effort fails – the cash was wrong put – a freebie without return
    ~the corporate entity is the new feudalism
    ~the western way instills desires for the madison ave to hollywood life * (USA ref)
    ~the western way desire captures hearts into consumption
    ~consumption drives prices up and/or labors up into job expansion
    ~consumption of non-renewables eventually is a SNAP
    ~that SNAP is what has been paraphrased as centuries of wash rinse repeat**

    which Matrix do you want/wish?

    *coda – I have been on a tear lately of the advertising model provide’g for free intake of media – people love media – folks love to build media – especially when near free …. double down that thought with QE-infinity

    **coda – or termed disaster capitalism .. new real Demand with less labor available & most likely less regulation

    ~
    Final before Submit .. don’t waste precious’s – make life more fun .. cash is more than a tool – it is fuel air
    (currently)