Monday, June 04, 2007

Like the Kids Say... OMG,TMI!

There's and old expression; "A little bit of knowledge is a dangerous thing".

I'd like to add a corollary; "and so is a lot".

I was curious to see what the Market would do on Monday (June 4, 2007), because of the two events that occured on the weekend: 1) The Shanghai Composite dropped 8.3% and, 2) A terrorist plot to blow up JFK airport (and much of Queens) was nipped in the bud.

Truth be told, I was hoping for a nice big drop so I could go bargain hunting. But it was not to be. Perhaps because enough people shared my reactions; 1) The Shanghai Composite is a small and not terribly significant market that is nearly 70% comprised of small Chinese citizen investors - it shouldn't matter that much to us; 2) Oh, terrorists are hatching plans to blow up New York? Really? Tell me something I don't know.

And The Market shrugged. (Damnit)

So it didn't create the buying opportunity, I'd hope for. What it did do was call to mind our strange and paradoxical relationship with financial information; that we want more of it... and that getting it usually hurts our financial decisions.

Knowing too much hurts a lot of our decisions. In his book, Blink, Malcolm Gladwell details how Cook County Hospital simplified their ER triage. Their model eliminated all but four pieces of data to determine whether to admit a patient for a heart attack (electrocardiographic evidence, presence of unstable angina, fluid in the lungs, and a cutoff point for systolic blood pressure). Any additional data - even data that look relevant such as weight, age, etc. -- and the decisions got worse. To borrow an expression from teen-speak, it's "TMI" (Too Much Information.)

No one has understood or exploited the human mind's unhealthy relationship with TMI better than the Gambling Industry.

Ever been a horse track? The helpful track owners provide information on lap times, finishes in previous races, breeding, performance in mud, or rain, on grass, on dirt, the record of the jockeys... they give you literally 100s of different variables to factor into your decision. Does it help? No! It's TMI. Many data points are simply red herrings. But the relationships between the variables are too complex, and the sample sizes usually too small, to make any meaningful conclusions anyway.

The gambling industry knows that most gambling information is specious; it looks important, but is useless for prediction. Sometimes they even know that we know. At a roulette table, the board above the wheel posts the last 20 or so numbers that came up. Nothing could be more irrelevant, and only the most naive player doesn't understand this. But people actually pay attention to what happened before! They love it! "Oh, look. It hasn't hit # 23 in a while!", or "It's been black 4 times in a row now!" Seeking TMI isn't just a human inclination, it's fun!

So what of investing? With Blackberries, Real Time Market Quotes... Jim Cramer, we have more information than we know what to do with. And it's available any time. How do we sift through the haystack of data to find the needles or relevancy?

It starts with an understanding that much of the information we encounter is like that on the roulette board - interesting, but irrelevant. It also means recognizing that, even with quality information, you can have too much of a good thing. Lastly, we can recognize that information that is Frequent, Emotional Evocative in content, and Recent are most likely to be overly influencial in The Market's short term decision-making. (I would say that the terrorist plot meets the last two criteria and the Shanghai drop meets all three). It's a great way to spot short term buying and selling opportunities.

Simplify. Avoid TMI.

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