Thursday, November 09, 2006

Wall Street Editors Refuse To Be Confused By Facts

Updated below

One of the big problems with financial reporting--apart from the shaky understanding most journalists have of how business and markets actually work--is the fact that the economy is so complex that it's always easy for reporters and editors to concoct "explanations" for anything that happens by finding specific events or trends that reinforce their prejudices.

As Kevin Drum notes today, one of the most deeply ingrained of those prejudices--despite abundant evidence that it is factually wrong--is the assumption that Democratic rule is bad for Wall Street. So how did the journalists respond to yesterday's post-election rally? Kevin caught this headline on CNN:
Techs lead turnaround as investors move beyond possible Democratic control of Congress
Kevin comments:
Yes, you read that right. Not "Dow Moves Randomly for No Special Reason." Not "Dow Welcomes Democratic Victory." Not "Dow Higher on Hopes of Iraq Withdrawal."

Nope. The mind readers at CNN decided that in the space of just a few hours investors had both panicked and recovered over the dire threat to the economy posed by Nancy Pelosi. Crikey.
It so happens that I wrote a little something about this in a forthcoming book, The Upside, a collaboration with the brilliant business consultant Adrian Slywotzky:

One of the problems we have with understanding transition risk is that, when we look at the past, we see one history. And because we know what happened and have assimilated those events into our view of the world, that real-life history appears inevitable: "How could it have happened any other way?"

This is why it's so easy and so tempting to produce after-the-fact rationalizations for events that startled us when they happened. Listen to the political pundits the day after a close election. Every one has a clear, logical, iron-clad explanation of why Candidate A edged out Candidate B--including all the pundits who were absolutely certain, twenty-four hours earlier, that Candidate B was sure to win. In the same fashion, when the Dow Jones falls, the analysts and TV talkers have no trouble explaining the factors that made the drop inevitable--"weakened earnings expectations," "uncertainty overseas," "a sluggish housing market." Given the exact same data and a rising Dow, the same experts will offer an equally plausible set of explanations for that result--"rising productivity," "consumer confidence," "lower interest rates."

We look backward, see one historical path, and quickly learn to view it as obvious and inevitable.

As a result, the pundits find their prejudices confirmed by everything that happens, no matter what it is. Another good reason to take what you read in the papers--especially so-called "expert analysis"--with a huge helping (not just a grain) of salt.


Today (Thursday), the markets went down. But since CNN announced yesterday that traders had already absorbed and gotten past the election results, I guess they can't possibly blame today's decline on those results, right? Guess again:

A three-session advance hit a roadblock Thursday, with investors bailing out of drug, telecom and financial stocks, following confirmation that the Democratic Party will control all of Congress for the first time since 1994.
Yet another demonstration of the role that logic plays--or doesn't play--in most news "analysis."

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