The ‘most ridiculous’ statement in finance and why investors should ignore it By Shawn Langlois Published: Dec 4, 2017 4:53 a.m. ET
‘The market fell/gained today because…’ You probably read this kind of sentence every day somewhere on Bloomberg, CNBC, The Wall Street Journal and, yes, even MarketWatch, but, according to Tony Isola of Ritholtz Wealth Management, it’s the “most ridiculous” statement in finance.
“Confusing a closed-ended science experiment with the reactions of billions of market variables is a death sentence for investors,” he wrote.
The experiment Isola is referring to comes from the book, “The Invention of Air,” which details how one mouse was put in a jar with a sealed lid and died quickly, while another was put in another jar with a mint leaf and lived for 10 minutes.
“The sealed jar provided the ecosystem to prove that plants emitted oxygen. This groundbreaking discovery was possible because the variables were limited and controlled,” he said. “Markets don’t operate in sealed jars.”
There’s been a lot of research into this in behavioral economics. Experiments have shown that
when confronted with random events our brains are wired to find causes, not to understand
probabilities.
However, the inverse isn’t true…doesn’t mean there can’t be a cause.
Also, the results from one day are a fairly low barrier for the author…if he moved the time frame
to a year or more, imagine the pushback he’d get saying the jar is not sealed.
However, the inverse isn’t true…doesn’t mean there can’t be a cause.
Bid and ask, supply and demand.
“On the first day of NYSE trading after 9/11, the market fell 684 points, a 7.1% decline, setting a
record for the biggest loss in exchange history for one trading day. At the close of trading that
Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down almost
1,370 points, representing a loss of over 14%. The Standard and Poor’s (S&P) index lost 11.6%. An
estimated $1.4 trillion in value was lost in those five days of trading.”