Tuesday, April 23, 2013

That's the news

Stocks briefly drop, recover, on fake bomb tweet

Nothing against Twitter, but this is exactly why I'm always asking people who say things I don't necessarily believe, "Where did you hear that?  Twitter?"  I think people put too much emphasis on sources like Twitter.  The volume of information available on Twitter is, well, it's a lot.  And having that much information right at your fingertips makes you feel well-informed.  And feeling well-informed makes you overconfident.  And overconfidence can lead to some really bad outcomes.  And yes, the market dropping like it did is a sign of overconfidence, even though it appears to be a sign of lack of confidence.  In this case, it is overconfidence in the information source.

What happened today, though, goes a little farther than regular overconfidence.  The drop and rebound happened so quickly that it is more likely that it was started by automated traders using news reading software to initiate trades.  This way, trades can happen far more quickly than with human readers because there is no judgment involved.  A headline is either good or bad, but there's apparently no test for whether the headline is true or false, or whether it's from a reliable source for that matter.  Here, we have overconfidence that our news sources are incapable of providing false information.

So, if an investor happened to be on top of the market when the drop occurred, they could, perhaps, have profited.  Then again, they could have lost.  But for those of us who were blissfully unaware until after the fact, we're no better and no worse than before.  Sometimes, especially in the case of information, less is more.

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