Paul Kedrosky's Infectious Greed

New paper:

How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper

Carlos Carvalho*, Nicholas Klagge*, and Emanuel Moench

How efficiently do financial markets process news of unexpected events? This question becomes particularly salient now, as multiple events across the globe drive market movements. Do these gyrations reflect responses to fundamental news or to “noise”? In general, it is very difficult to discern how well markets process information, because there is no objective way for observers to separate fundamental news from noise components when markets react to a news report. In this post, however, we examine an unusual episode involving a false news report that provides a unique look into this question. We find that even when noise can be clearly identified, markets may take as long as a week to fully process the “signal,” or relevant information, component of news.

On September 8, 2008, a six-year-old article about the 2002 bankruptcy of United Airlines’ parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company’s stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. Trading volumes skyrocketed during these extreme price movements. In subsequent days, the stock traded as much as 17 percent below its September 8 closing price, and on September 15 it finally traded above the price level seen just before the false news impacted the market.

…    Our main findings are depicted in the chart below. It shows that after three trading sessions, United Airlines’ stock was still trading significantly below the counterfactual level implied by our model. Only on the seventh day after the episode did the stock trade at levels consistent with the absence of any residual effects attributable to the false news shock.

via How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper – Liberty Street Economics.

Interesting graph from EIA showing that the time from oil discovery-to-production in the Gulf is shrinking quickly. You can read that both bullishly and bearishly, but it’s worth pondering either way. [-]

Good interview with Michael Lewis:

Lundborg: You say that when confronted with a dark room filled with money, Americans grabbed as much as we could.

Lewis: The common theme between public employee unions, say, and Wall Street bankers is an excessive focus on the short term and a weird blindness about the long term.

It’s unsustainable behavior, parasites everywhere killing their hosts.

via Michael Lewis Slams Wall St., Leadership Deficit – Bloomberg.

Graham Hill on the merits of less stuff.

I’m not a huge fan of the interviewer’s approach, but Felix Zulauf is always good fun.

[Dr. Frankenstein leans in for a kiss]

Elizabeth: Taffeta, darling.

Dr. Frederick Frankenstein: Taffeta, sweetheart.

Elizabeth: [pulling away] No, the dress is taffeta. It wrinkles so easily.

via Young Frankenstein (1974) – Memorable quotes.

New paper on why game theory falls down in the real world of complicated games, like financial markets:

Complex dynamics in learning complicated games

Tobias Galla, J. Doyne Farmer

Game theory is the standard tool used to model strategic interactions in evolutionary biology and social science. Traditional game theory studies the equilibria of simple games. But is traditional game theory applicable if the game is complicated, and if not, what is? We investigate this question here, defining a complicated game as one with many possible moves, and therefore many possible payoffs conditional on those moves. We investigate two-person games in which the players learn based on experience. By generating games at random we show that under some circumstances the strategies of the two players converge to fixed points, but under others they follow limit cycles or chaotic attractors. The dimension of the chaotic attractors can be very high, implying that the dynamics of the strategies are effectively random. In the chaotic regime the payoffs fluctuate intermittently, showing bursts of rapid change punctuated by periods of quiescence, similar to what is observed in fluid turbulence and financial markets. Our results suggest that such intermittency is a highly generic phenomenon, and that there is a large parameter regime for which complicated strategic interactions generate inherently unpredictable behavior that is best described in the language of dynamical systems theory.

via [1109.4250] Complex dynamics in learning complicated games.

Interesting new paper:

The Liability of Leading: Battling Aspiration and Survival Goals in the Jeopardy! Tournament of Champions

We extend the variable risk preferences model of decision making to a competitive context in order to develop theoryabout how competition affects both focus of attention and risk taking. We hypothesize and find support for leader–follower differences in the channeling of attention to an aspiration or survival point. Our results indicate that leaders focuson their aspiration point, whereas followers’ focus of attention shifts between their aspiration and survival points. By identifying and elaborating on the different cognitive loads and social expectations related to the positions of leader and follower, we show that leaders are prone to take excessive risks to maintain their leadership position. We refer to this phenomenon as the liability of leading. Our study context is a naturally occurring experiment in strategic decision making, the Jeopardy! Tournament of Champions.

• Fawlty Towers: "Communications Problems". Such classic TV. http://t.co/9YZizvOj ->
• Super Atlantic photo set – World War II: The Allied Invasion of Europe http://j.mp/nago0z ->
• Cute geek punning: "Fossworldproblems" on Reddit – http://t.co/9vtT6QzC ->
• Just what I need: People talking to their iPhones even when they're not talking on the phone. Please, no. ->
• Leopold Kohr fifty years ago on the inevitable 'crisis of bigness' http://t.co/D8bJw7sZ ->