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The Spread of Information, or Why a False Meme Spreads Faster, by Steve B.
Whether it is in a social setting or an investment counsel, false information generally has the ability to spread further and faster than more accurate and truthful information. Why would partial truths have such ability in a world where people pride themselves on finding the truth? Could this help explain why investment boards are more receptive of investment projections longer than 6 months than those for only the next month? Is it possible this could also help explain the exponential growth of the hedge fund business?
The spread of information is a function of simplicity; the more complex the less likely others are prepared to accept the facts. In the modern world information in the media is typically written at the grade school level who else reads some of those publications. The simpler the message the swifter and deeper will be its penetration into the public or investing community. Why are people paying extra-ordinary fees to hedge funds when there is no evidence these people are any more intelligent than the general investment community at large. Let s explore this into more detail.
The notion that a false meme or belief spreads swiftly in the population is evident in all facets of the investment community. What is the best way to get your idea across to the general public? We need to start with a basic concept and keep it basic. Such ideas are the use of head and shoulder patterns; everyone can remember this basic technical trading pattern. Amongst the folks who consider themselves better informed there are false beliefs such as PE ratio s, dividend price ratio s, yields, earnings price ratio, payout ratios, book market values, interest rates, GDP and inflation rates. In our opinion most valuable information is not well known as the mass dissemination of information reduces it eventual effectiveness.
The common cold best at spreading due to its simplicity even though being simple it is still incurable.
The purpose of the simplicity is due to the nature if the investment business. The only way to get people to invest with our firms is to present our information in an easy to understand format or alternately present information that customers could envision using themselves. Nobody wants to think too hard. More importantly being able to use the information ourselves gives us the feeling of empowerment over our universe and gives us the ability to impress friends and colleagues with our new found knowledge. If the information was complex it would be difficult to digest and even more difficult to pass along to others. This explains why many theories are only known to a few with the intellectual or specialty knowledge, most others would just be plain bored, confused and uninterested as they will not be able to apply the knowledge to create wealth.
Even complex strategies may have little if any statistical forecasting ability. Some would have you believe complexity equals greater profits.
How is one to differentiate between this misinformation and the truth? This fine line need not necessarily be black and white. In the grey matter there is valuable information as the information is being transferred from individual to individual it is creating a demand for securities that can carry markets in the short term. Some may refer to this as the momentum effect or the self-fulfilling prophecy such as when a head and shoulders pattern causes a sharp drop in security prices. Regardless, if we are aware of how the other players we can position our investment strategy accordingly.
Dispersion of market information can in this new view can be better understood than being considered random. Our ideas raise interesting questions about the views that most players have about the market and how these views impact their trading and asset allocation practices. In practice you may notice technical patterns using the head and shoulders pattern causing short periods of panic after which the market will presume more normal activity. Economic data may cause some fundamental players to re-allocate assets to areas they believe will benefit from coming changes in the economy. Both the technical and fundamental ideas that spread beyond the initial crowd may escalate into a feedback (momentum) pattern that will create longer-term changes in security prices.