We unveiled one of our favorite 4PM pastimes back in April: called The Correlation Game, the steps are simple:

• Step One: Point your browser at Yahoo Finance, Marketwatch, or whatever mainstream financial media portal suits your fancy.
• Step Two: Scan the top headline, which is typically of the form, “Markets move x on news that y.”  If the headline includes a dubious assumption or inference about causation, take a drink.
• Step Three: the next player moves to the next headline and/or media outlet, and repeats step two.
• The last player to fall over or to refuse to believe that some shots fired in the air in the Niger delta have any intrinsic relationship whatsoever to the price of West Texas Intermediate Crude, wins.

Let it be noted for the record that this is not a game to be played every day.  Why?  Well, if you’re familiar with a) the kind of reporting that goes on in mainstream financial outlets and b) the metaphysical difference between correlation and causation, then you know that playing The Correlation Game every day is an ungracious way to treat your liver.

The news today is that some academics are backing up the intuition behind our game: the New Scientist reports that

Earlier this year, physicist Jean-Philippe Bouchaud and colleagues at Capital Fund Management in Paris studied the news feeds produced by Dow Jones and Reuters that provide real-time reports of items of potential interest to investors. Looking at more than 90,000 news items relevant to hundreds of stocks over a two-year period, they studied how “jumps” in stock prices – sudden, large movements – were linked to news items.

They weren’t. Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps. “Jumps seem to occur for no identifiable reason,” Bouchaud says. [link, via Adam via Don Fishback]

Adam speculates on three possible causes of the “markets do X because of Y” headline phenomenon: laziness, conventional wisdom, and bias.  All true, though to be fair to the journalists we like to tease so much, the root cause of all this is probably just our humanity.  Hume knew as much; social scientists even have a name for the cognitive bias.  And it’s not like you can sell newspapers or drive traffic by going with headlines like, “Markets sell off hard for reasons that are epistemically opaque; in entirely noncausal but correlative news, oil rises dramatically.”

Actually, on second thought, we would totally subscribe to any publication that literate.

Last 5 posts by Condor Options

• Midweek Sméagol Reading - August 20th, 2008
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• They Have the Passports to Prove It - August 13th, 2008
• Sleepy Nasdaq - August 12th, 2008
• Market Neutral, Not Delta Neutral - August 12th, 2008