Stop Anthropomorphizing Markets !

 

 

Actv. What a financial market supposedly does. As if it were a living creature with a sense of self and volition . . . Depicting a financial market as an athlete sprinting, leaping or cliff diving makes news coverage more exciting than a droning flux of numbers.

The above definition is from “The Devil’s Financial Dictionary,” Jason Zweig’s market-focused version of Ambrose Bierce’s brilliant early 20th-century satire on the meaning of common words.

Zweig cites research by Michael Morris, a professor at Columbia Business School, who wrote (with three other professors) a paper titled “Metaphors and the market: Consequences and preconditions of agent and object metaphors in stock market commentary.” The conclusion: How commentators speak about markets can influence investors’ opinions.

The researchers divided market punditry into two distinctmetaphorical approaches, which they call “agents” and “objects.” Those who employed agent metaphors “describe price movements as action, as the volitional, internally-driven behavior of an animate entity. This type encompasses anthropomorphic description as well as description of the market as like an animal.”

Examples include “the Nasdaq climbed higher,” or “the Dow fought its way upward,” or “the S&P dove like a hawk.”

The object approach uses metaphors to describe price movements “as events in which inanimate objects are buffeted by external physical forces.” For example, “the Nasdaq dropped off a cliff,” or “the Dow fell through a resistance level,” or “the S&P bounced back.”

We know from Princeton professor Burton Malkiel that markets take a random walk, without a predictable pattern or memory from day to day. Hence, describing markets as having volition or the ability to act on their own might be colorful and make dry reports more readable, but it isn’t in any way accurate.

Here is where things start to get really weird: Morris et al. found that when observers were exposed to agent metaphors, they were much more likely than they otherwise would be to expect the prior day’s price movement to continue the next day. As it turns out, the language we use to describe market moves changes both our expectations and our behavior.

This research is particularly applicable this year. Major U.S. stock and bond indexes may be little changed year-to-date, but there have been huge swings. Commodities, on the other hand, have had big declines, with oil, copper and gold all at multiyear lows. Next time you read or hear a report describing a day of trading, pay attention to the language used. Do the words convey positive or negative attributes? Then ask yourself how you feel after taking it in. Remember this: The commentators who spice up their observations by using metaphorical language may be clouding your judgment by eliciting an emotional, rather than rational, response to market reportage.

The important thing to be aware of is that getting swept up in market commentary can be detrimental to your portfolio.

Zweig makes a modest suggestion that should have the desired affect upon any consumer of commentary and market news (and if you are reading this column, count yourself as one of them). Whenever you see an anthropomorphic description or “action verb” describing what happened, translate it into a percentage basis.

Make the sentence “The Dow jumped 100 points today on strong earnings reports” into something more like “Industrials rose 0.4 percent for reasons no one understands.”

Your portfolio, if it could think, act and speak, would thank you.

 

 

Originally published asStop Thinking About Markets as if They Were Human

 

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  1. marketmap commented on Jul 28

    The ultimate is when an analyst, who’s getting a few hundred grand in annual salary, when being interviewed on CNBC and says ” it feels like the market wants to go higher” … easiest gig in the world !

  2. faulkner commented on Jul 28

    Great article, and here is the sticky part: In order to think about something complex, out-of-human scale, abstract, and/or distant from us in time and/or space, we humans think of it in terms of something else that is sensory and much easier to understand (metaphors). Making metaphors is a primary process of System 1 understanding. Thinking of the market as a person specifically uses the master tropes (key concept transformers) of metaphor; the market is something else, synecdoche; the market can be characterized by a part of the market, and personification; the market can be understood as a person (with affect and intentions – cause we understand people so well.).

    The interesting switch from agent to object also implies a lack of control. A falling rock (or knife) stops when it reaches the bottom floor. It is dangerous to try and catch it. Also, if anyone ever does the research, they will find markets fall faster than they rise. This may be, in part, due to gravity is being used as a metaphor for the upward (“climb a wall of fear) and downward (“fell”) movement. In human experience, things rise slower than than they fall.

    To describe a market as a complex, ambiguous system fraught with stocashtic undercertainty and subject to reflexivity and endogenous effects – all of which can only be viewed through a person’s time, space, capacity and metaphorically limited information processing system is more accurate, and well not impossible to visualize and far less entertaining to comment on or write about.

    A solution is to understand how the semantics (semiotics) of how all this works, and how to work it.

  3. Concerned Neighbour commented on Jul 28

    Or better yet, stop calling them “markets”.

    Nice mega-bounce off the 200 DMA today, as stocks – being 2.5% below all-time highs – were apparently “oversold”. The 200 DMA seems to be the line in the sand that the “markets” are not allowed to trespass.

  4. Bookman commented on Jul 28

    or forget the math and conjure up a potion

    and with sacred secret motion

    stir a mix of metaphors

    for what they might be good for

    sell one version to the fox

    another to the ducks

    either way you get to see

    why the system sucks.

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