The Thought Refuse

A Virtual Repository for the Mind

Pin The Tail On The Stock Market

with 3 comments

The recent fall out on Wall Street highlights the fundamental problem with the stock market.  It’s a pure guessing game more akin to the children’s game Pin the Tail on the Donkey then a sort of statistical evaluation of the nation’s economic state.  We are told that the stock market is a complex value estimation of the countries businesses present and future.  An army of economists armed with countless ledgers and spreadsheets deliver authoritative analysis on the future value of stocks, and direct us where to invest in order to maximize our returns.  These professional economists, alongside their financial adviser compatriots, are nothing more then best guess givers, and horrible ones at that.

I once heard a jaw dropping statistic that the stock market, over the course of it’s life, has gained or lost nearly half it’s value in only 50 days of trading.  It begs the question – how can a market guarded by so many professed experts be prone to such wild shifts in value?  Two immediate answers jump out at me.  One, the stock market is driven by such large, random events that massive swings in value are uncontrollable.  And two, that economists tend to gradually overvalue stock prices and occasionally are forced to make massive adjustments downward due to critical mass evidence.

Both of these don’t speak kindly to the prowess in skill of economists.  The first indicates that a market under the guise of extreme randomness cannot be estimated.  Any expert economist offering up investor advice is more like a mentalist masquerading as a psychic feeding his customers with information irregardless of it’s accuracy.  The fact that it’s delivered is of prime importance to the economist.  However, supplying certain data based on a fundamentally uncertain system is ethically suspect.  Or it’s just another opportunity to generate income for the individual.

If not the first then let’s settle for the second conclusion that we are simply optimistic estimators.  Everyone has noticed the cycle of the stock market.  It will gradually rise in value without any major upticks in value, and every once in awhile takes a terrible tumble.  I attribute this to our penchant for overestimation in all aspects of life.  It serves as a natural self defense system against mental and emotional degradation.  It’s only when confronted with undeniably definitive information that the bottom falls off, and a drastic correction in stock value occurs.

An analogous comparison I’ve encountered is that of the Hollywood Stock Exchange.  It’s a fun little game where players buy and trade movie and star stocks.  Traders speculate what a movie will make at the box office, and following a movie’s opening weekend, the appropriate movie stock will adjust up or down based on it’s actual earnings.  On average, movie stocks adjust roughly 33% following an opening weekend, and the vast majority of stocks adjust downwards in value.  So, traders overestimate by nearly 1/3rd the value of a movie’s opening box office.

The stock market, despite what all the experts will tell you, is an random and uncertain playing field.  It’s a best guess game, and even our best guesses are not particularly good.  It’s one glaring fault is that it’s littered with experts spewing statistical probabilities against improbable trends to anyone with a dollar to invest in the market.  Economists collect extravagant salaries to advise corporations with their unflappable numbers.  Traders gouge investors with commissions offering up best guess investments moves.  These experts have the pin in their hands and are optimistically yet blindly moving closer to the donkey confident they will land on their target.  Except when their eyes open and that pin is two feet off center, it’s the spectators that end up footing the bill for such failing expertise.


Written by huxbux

September 23, 2008 at 12:57 pm

Posted in Business

Tagged with , ,

3 Responses

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  1. […] Original post by huxbux […]

  2. Great post. Thanks for the analysis.

    September 24, 2008 at 2:17 pm

  3. Thanks for the comment.


    September 24, 2008 at 4:35 pm

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