This Is the End


Markets, Risk and Human Interaction

November 30, 2010


This reflects my personal opinion, not the views of the SEC or its staff.
Sarah Palin's "Being There" ascendancy may strike some as absurd, but it provides a case study for what now counts as news. Today, going viral matters more than the information itself. The object lesson that Palin brings to politics is something we should fear for the financial markets, where going viral can transform information from being the bedrock of market efficiency to a source of irrationality, even crisis.

For example, the most important lesson to come out of robo-signing is not the fiasco itself. The incomplete and flawed documentation for foreclosures has been well known for over a year, as have the practices of “endorsing in blank”, inaccurate reporting of remittances, inflating appraisals and applicant earnings, to name a few. The robo-signing revelation is just one more shoe to drop. The important lesson is that it is a shoe that gained legs, so to speak; that went viral, topping the list for news, blog repackaging, and possible Congressional hearings. As a result, robo-signing is the item that had an impact on financial stocks which could have occurred based on any number of problems that were already known.
More broadly, the lesson from Palin and robo-signing is that we are entering a new age for the way information affects the markets, an age when going viral matters more than the information itself. Information has gone from being illuminating to being a source of risk, and not because of content, but because of the vagaries of what might gain traction.
To put this into perspective, follow the path of the role of information in the markets.
The age of private information. There was a time when information gave an advantage, when there was an edge to getting information ahead of others. Rothschild famously received early news of the British victory at Waterloo; commodities traders hired teams to wander the cocoa fields on Ghana counting pods; equity managers used their influence to get a jump on earnings announcements.
The age of too much information. The push toward transparency eroded this advantage. But the requirements for transparency throw out so much information that it is difficult to find what is relevant. Information can hide in plain sight; if every drug may cause nausea, insomnia and drowsiness, then we get to the point of, “I have to list everything I can think of, but you know the game. Just ignore it and try the stuff out”. The echo chamber of reposting adds noise to any news that is worth repeating, and much that is not.
The age of viral information. Information is moving from being the bedrock of market efficiency to a source of crisis. The risk for the market is not the news itself, but what news gets drilled home through so many channels that people act on it; we cannot anticipate when information might go viral and sweep the markets.. For retail markets – the municipal bond market and money market immediately come to mind – it is easy to envision a “USA Today effect”, to use an anachronistic expression, causing a run on the bank.
The greatest concern lies in information going viral that is inconsequential. For those in the market who are on top of the news and its implications, the question no longer is simply one of when others will finally get around to looking at the information and see that it is important. It is also a question of whether something irrelevant will catch the fancy of the cloud. Look at Sarah Palin and see the logical end to the inane You Tube videos that capture the imagination of the nation, or the ranks of the “famous for being nothing” reality show celebrities that Palin has elected to join.
The new, viral world means more surprises and more volatility; and not because of market shocks precipitated by content, but because of the randomness in what might happen to catch on and reverberate through the internet.


  1. Wall Street is and has always been the habitat of the herd. The difference is just better technology, things spread faster, everyone is watching the same thing on CNBC, so everyone can learn to think alike faster. I don't see evidence that previous memes and previous populists were smarter (or dumber) than today's.

  2. Interesting premise, but I would contextualize it differently.

    The viralness of market or stock moving news has simply evolved, from a handful of insiders and big fund managers, to anyone who can create an internet post.

    It is the mechanism of transmission that seems to have really changed.

  3. Nice bong-hit of information. You unintentionally conflate content with comprehension; they are two different sides of the same market, like a bid/ask spread. Palin works this market like the Federal Reserve, selling worthless fiat currency at higher and higher prices. The demand side is desparate for returns: America's cultural failures has spawned a larger and larger pool of irate and uneducated investors, desparately driving up the prices of content in much the same way as their owners have driven the cost of delivering comprehension downwards. Forunately, the market is not prejudical like you and I. Who winds up paying is always someone else's problem.

  4. Palin bashing is the new Bush bashing? Who could have seen that coming?

  5. This is a thought provoking argument which needs more work. We all struggle to find real information in the fire hose of data splashed at us every day but I am not sure that one can divide the "ages" so cleanly. I think all three exist today simultaneously. A good follow up article, given your experience, might be how we deal with each type.

    "Rothschild info" - There appears to be a thriving "under the counter market" in "real market moving information" which is not generally available. But, raids are still going on so let's presume innocence for now.

    "Kitchen sink approach" - We have been and still are inundated with the "too much data" phase which you correctly point out leads to less protection and real information (no doubt the noble goals which got us here). As a trivial example, I just updated the software on my iTouch this morning. The agreement I clicked through could be demanding my first born in return for all I know.

    "Palin effect" - I am not sure how significant the "viral stage" is for investors with horizons that stretch to weeks and months. The markets get bent out of shape from time to time but they tend to bend into new shapes before long. I agree it is annoying that trivial issues seem to dominate but these trivial issues are "filling the vacuum". With US growth well below trend and alot of damaged trust in the wake of the financial crisis, is it surprising that smart but underemployed people with internet access are looking under every rock? Also, with no serious political issues to be resolved until the next round of elections, is it any surprise that we let a former governor of Alaska hit some populist chords while we put off figuring out where we want to go as a country?

    The sad fact is that most investors want a "hot tip" and most legislators want to be seen as "doing good now." But, with regulations like FD and bills that run into thousands of pages that no one has time to read before being put to a vote, we have brought much of this upon ourselves. Most of the all too human habits will remain but I think access to the internet will solve more problems that it will create going forward. We just need learn how to adjust our "data filters" so that we can get at useful information in a timely manner. It is never easy and "Mr. Market" always smiles slyly at our attempts to best him.

  6. We have the marketing industry to thank for this viral epidemic. From 1995 to 2000 Hotmail went from zero to 30 million users with the revolutionary viral email ad "Get your own free email at," according to This apparent authority on the topic reassures us that "viral isn't evil." In fact, they assert that it's honest and natural. Would that be like cholera is honest and natural?

    The defenders of viral communication point out that viral marketing was a response to the market getting overloaded with advertising from too many sources and consumers becoming skeptical--even cynical--about the trustworthiness of these traditional channels. With the advent of the web, email, messenger, iChat, blogs, and Facebook, it became apparent to marketers that their customer base was looking to its friends and peers for reliable, trustworthy information. And like good capitalists, the marketers followed their customer base, and the media moguls followed the marketers.

    Contrary to your assertion, Rick, that content doesn't matter in a viral communication, viral marketers contend that "The heart of a viral ad campaign is the content" (emakina, p. 17). You seem to be making a judgment about the perceived value of content. It appears that who perceives content and how they value it is an unexplored part of the case you are examining.

    You may be laying the groundwork for a new model of communication theory that could well represent a unification theory for the now-disparate fields of information theory and communication theory. As I understand these theories, information theory explores how best to package bits and bytes of data; communication theory explores the mechanisms by which we share with one another.
    Communication theory may offers tools for analyzing how human communication has been affected by the internet; information theory may offer some insights into how to make that communication "smarter."

    Communication as we experience it on the internet today is quite messy, I'd say, because of its newness. Like a toddler we're exploring its possibilities mostly to our great delight but also somewhat to our chagrin. Witness the toddler who first discovers the contents of his or her diaper.

    As you continue to explore this topic I can see where your new theoretical model might conceivably employ some creative application of information theory to assign value to information based on perceptual criteria (aka biases). This theory could also take you not only into theories of human development but also into addiction theory. Might well take you into the domain of consensus in bacterial ecosystems as well, if one is willing to accept that the internet is analogous to a bacterial ecosystem.

    As this model matures I'll be very interested in seeing what forms of measurement you choose for this system. Market volatility seems like an obvious choice, but the difficulty there would seem to be getting reliable correlations between a singular viral communication and subsequent buy/sell decisions in an environment where everything seems viral.

    Interesting point about Rothschild getting the early word on Waterloo. That information may have been illuminating to Nathan Meyer, but how could those on the other side of his trades (aka "The Greater Fools") have not considered that information a source of extraordinary risk after they realized their blunder? Is there a name for unperceived risk, e.g., the you-don't-know-what-you-don't-know risk category?

    Our greatest hope can be that your new model will facilitate the growth of probiotic flora in the bowels of the internet long before the host expires from an overload market-inspired toxins.

  7. I blame the media. They are colluding to get Palin the nomination.

  8. "The age of viral information" - an oblique way of restating part of Soros' "Reflexivity in economics/markets" thesis. We've been recording these frenzies since Tulip-time, but our new mechanisms for information transmission have made near real-time bubble creation a possiblity (and real-time popping, in the case of bad news.)

  9. Viral information is actually the only virus that makes good when it spreads...In fact the efficient market hypothesis (EMH) suggests that prices fully reflect "all available information" in the market. That means that no distinction should be made between bad and good information. In any case some information may appear to be good for you but bad for me and vice-versa. That's volatility! If you want to act on a piece of information you are free to do it otherwise you just double check that information. For instance high frequency trading is just based on small pieces of information getting into the mind of a trader and reflected into the price. Bad or good just he or she knows. Of course nowadays there is a sort of compulsiveness on acting...Think about a difference between a fax or an email transmitting the same kind of information: when it is a fax you go through it, you read it carefully and you prepare your reaction. If you get an email you just click reply to all, cc, bcc on whatever you have in mind and you spread your information or what you thing to be "useful" and that's become epidemic...that is a bubble. In this case I would say that the problem it's not really the information but the new mechanism for information transmission creating an epidemy or a bubble.

  10. Or maybe it's just that dumb people have found an easier way to communicate. Or pretentious intellectualism is no longer the gatekeeper of public opinion.

    The premise of news was that it told you what was signal and you could casually dismiss everything else as noise. This was particularly true during the reign of "networks" and "media giants".

    Modern media has placed the responsibility of determination squarely on the shoulders of the viewer. As social creatures who are also prone to shortcuts, we use polling / eyeballs as a decision surrogate.

    So we finally see the subjectivity of information itself. Viral is just the democratization of the signal.


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