Subject: Unintended consequences Stock Market

Posted by Charles Tse on 5/7/2010
In Reply To:Unintended consequences Stock Market Posted by Richard Turnock on 5/7/2010

Message:

While I do not dispute there are "unintended consequences" in the trading rules that helps create yesterday's chaos, the CNN article is just poorly written.

It attempts to make a point that "Circuit breaker has opposite effects."

It cites evidence that "Shares of P&G fell 10% at around 2:45pm...at which point the stock hit what's known as a 'circuit breaker.'" Then at the end of the next paragraph, it says, "The Dow, which was already down about 200 points at the time, quickly dropped about another 200 points in the 15 minutes between 2:30pm and 2:45pm."

Notice that the drop in the Dow that the author mentions (2:30pm-2:45pm) happened **BEFORE** P&G hit 'circuit breaker' (2:45pm). Just poor presentation of the fact. What he should report, however, was that as P&G represents about 4% of the index, when it drops 38% or $23, equates to roughly a 175-pt loss in the index.

If they are going to assign cause, you'd hope that they would at least get the causality sequence correct. Sigh.

I find that causality thinking (instead of systems thinking) dominates financial news, as reporters look at what happened and then try to assign a cause to it. As a result, we get funny headlines such as "Strong job report pushes Dow higher" if market is up, and then later changed to "Job report disappoints investors; stocks plunge" when market turns around, even when the content of the job report doesn't change at all.

Another example of that is "Recession reduces number of applicants to prestigious private colleges" (early 2009) b/c students can't afford the price tag. Then in a year, the headline becomes "Record number of applicants to Ivy League schools amid recession" b/c students can't afford NOT to go to the very top schools because of degrees from those schools is the only thing that can guarantee a job in bad times.

The very few who think systemically, like George Soros with his Reflexivity, thinks beyond Step One, and can see the dynamics of how things evolve.

ciao,
Charles

Follow Ups:

Unintended consequences Stock Market - Philip Abode 5/7/2010 
Unintended consequences Stock Market - Warren Farr 5/7/2010
Unintended consequences Stock Market - David Gillespie 5/7/2010
Unintended consequences Stock Market - John Sterman 5/7/2010
Unintended consequences Stock Market - Philip Abode 5/7/2010
Unintended consequences Stock Market - Chad Green 5/7/2010
Unintended consequences Stock Market - Bill Braun 5/7/2010