Another Reason for Lousy Stock Market Reports

Dubner recently questioned whether there’s much (or anything) to be learned from stock market news.

A paper by University of Michigan political science professor Arthur Lupia and his students points to a major reason stock stories lack substance:

“Point blindness,” or what happens when news reports and citizens don’t realize that the value of a stock index point changes frequently.

Lupia proposes alternate — and easy — ways of reporting stock market information that will allow citizens to draw real inferences about stock values.

This skill is important, says Lupia, not just for someone’s own financial future, “but also to governments and others whose assistance will be sought if scores of people make bad investment choices simultaneously.”


Having read the first ten or so pages of the paper, all they say is "It looks like the Dow went up -- but the Canadian loonie went up even more!" Who cares? I don't buy anything with Canadian loonies. I don't have "point blindness" because I think the Dow did well from 2002-2007. All I have is "foreign-currency-ignoring-blindness" that keeps me from knowing the loonie did even better. But my perception of the Dow is right on.


I want the job of the guy who has to write headlines explaining the markets every move.


Hey! I took a class with this professor. I didn't know that his research was economics-based, though, as the class was basically Intro to American Politics. How refreshing to know that my tuition is leading to something fruitful (or, judging from the comments above me, something controversial enough to potentially lead to something even more fruitful)!


Always thought the reports that talk about the Dow, NASDAQ or foreign exchanges being up or down so many points is practically useless. Not having read the cited paper, at least reporting market movement in percentages consistently would be a good start and perhaps constrasting that with how the daily swing compares with some average variability would help the public to understand whether yesterday was a good or bad day on Wall Street. Sometimes the market is like the weather -- it just "is."


The paper says

"At December 27, 2006's exchange rate of 1.161,
she can exchange her 15929.83 CAD for 13720.79 USD - for a gain of 3074.64 USD.
Since the loonies were simply held under a bed, this gain is not taxable."

Um... what? Are they sure? Sounds like income to me.

nick gogerty

business headlines = Sports headlines

insert adjective+Verb and silly justification for daily move. 99% of daily moves are random. I prefer anthropic narrative descriptions to headlines, they are just as effective but more fun....

The dow went for a walk today to pick up a pack of smokes and came back 20 points lighter. :)


BTW, the Dow is at 12,810 right now and closed one year ago at 12,961 a 151 point drop. 151 points in 12 months is just not that big a deal. It's been volatile as all get out over this year, but to only be off that little over the course of the year is not worrisome. Media reports never give you the full context, as "point blindness" makes clear.


Garbanzo @1 has it right, the daily reports should speak in percentage points. As I write this, the Dow is at 12,810. If it closes at 12,682 it will be reported as "A 128 point drop! The XXth biggest drop in history! This points to a likely recession and the end of the world as we know it!" by a hottie info-babe. It should be reported as a 1% drop and not material. But keep the hottie.

And the Dow only matters if you're in a Dow-indexed fund.

Same thing happens with gas prices these days. Just heard that gas is up 17 cents per gallon in the last two weeks. Let's see, I just paid $3.51 yesterday, so two weeks ago it must have been $3.34, which sounds about right. So, we've had a 5 percent increase. Doesn't sound so bad to the massess reported that way. "17 is bigger than 5, right? Honey, what's on channel 128?"


I think kebko has something of a point - most US retirement investors legitimate frame of reference is the value of their investments in US dollars only, because that is the currency in which the retirement savings will be spent. The fact that the Euro has increased in value much more is sort of irrelevant if you aren't going to be spending Euros. Inflation is probably more relevant.

However, I don't think that comparing stock investment to currency speculation (or commodities) is really comparing apples to oranges. The main thrust of the article seems to be that people aren't aware that currency speculation (or gold) is, in fact, sometimes a much better bet than the stock market, and reporting of stock market gains would be more useful for investment decisions if put into the context of the performance of other investment options (e.g.: Loonies, or foreign stock funds, or gold). But I think people already can easily see this by noting exchange rates or commodity prices in dollar terms.

I happen to be fairly aware of this since I own some foreign assets, so I may overestimate the extent to which other people think about their investments in terms of "I can put money in the stockmarket, which has seen X appreciation, or into a foreign currency or asset, which has seen Y appreciation in dollar terms, or into gold which has seen Z appreciation in dollar terms," but I'm not sure people are quite as unaware of the possiblity of other investments outpacing the US stock market due to relative dollar-value fluctuations as the authors assume. (I may be entirely wrong, given how every 401k presentation I've ever seen goes on and on about DJIA performance over 20-30 year time horizons vs CPI.) They seem to assume that the information people need is an adjustment of the DJIA to show its performance relative to non-dollar investments, but just as valuable is information about those other investments in dollar terms, and a lot of that is already readily available in the form of exchange rates and commodity prices. The Economist reports weekly on the movement of foreign stock markets in dollar terms - not that everyone with a 401k should subscribe to the Economist, but the information is hardly a state secret. (Maybe the authors' point is that people are vaguely aware of all of that but need journalists to connect the dots for them. I guess I have more faith in the average American worker bee.)

The problem may really be an assumption that US stocks are just what one invests in. The relative valuation issue only arises if you assume people are affirmatively deciding to invest in a DJIA index fund based on a lack of knowledge that, while the DJIA is doing X, foreign currency prices are doing Y and oil is doing Z. A bigger issue than small-joe investor education is that 401k portfolios often don't give much opportunity to invest in foreign assets, currencies or comodities, and setting up alternative investment vehicles is intimidating, time consuming and, potentially, expensive.

Of course, the effects of relative tax treatment are another issue entirely ....



If I own the DJIA, I'm interested in how many dollars I have. I think this paper is completely off-base. To add currency speculation into the reported number only confuses matters. If I want to speculate in currencies, I'll go seek out that information. I live my life in dollars & that's what I'd like to know about. Long term changes in value will be accounted for, albeit imperfectly, in inflation adjusted measures. Imperfections in inflation figures may be cumulative, so that they would cause large innaccuracies over long periods of time, whereas currency market fluctuations should revert to the mean over longer periods. But, for daily index reporting, this certainly doesn't make non-dollar reporting more accurate.
I also think this kind of research is a product of the pessimistic bias, because when gold settles back down & drops by $300 dollars, I doubt that we'll be seeing a lot of research showing how the Dow is up by 40% more than what the dollar-based number suggests. We only tend to notice these things when they tickle our fears.



Not surprisingly, in a small scale experiment testosterone and cortisol hormone levels were found to mirror traders daily performance.

Bad Day for the Dow? Blame Hormones

Perhaps swings should be reported in ng testosterone/dL trader mass?


Very much agree with Garbanzo that swings ought to be reported as percentages. Oftentimes an index will move by less than a tenth of a percent throughout the course of a day, but it's dutifully reported as "news," I suppose out of habit.


But you don't tell us what their alternate is!


Very good paper, and pretty depressing. When viewed through this lens, even the best market news of the last 10 years is negative, and it doesn't take a genius to see where the money has gone.

The information is already available for the average investor to track the indexes in the way the paper suggests, and it would take almost no effort for the Times and other papers to add value to the stock market reports in this way.

So why do I have the feeling it will never happen?

Joseph Harris

Sounds to me like a professor with time on his hands. As another professor, C E M Joad - when appearing on The Brains Trust in the UK in the 1940s - used to preface every answer 'it all depends what you mean by...'

And what information one seeks depends on so many things that there is no one-size fits all. Investing for the long term is quite different to investing for the short. Capital appreciation is almost opposed to dividend seekers. And so it goes on.

But it must be noted that, to make sense of figure or percentage reporting, one needs to have an idea of expectations. So, if the economy is perceived as 'good' how much should the Dow, the Footsie or any other measure move; conversely what movement, and over what period of drops signify a correction, a recession and a depression.

A measure standing still - in a growth economy - implies stagnation, while if steady state is desired it looks a happy measure. And are rapid moves upward signs of inflation to follow?

As for foreign exchanges - if guessing the stock markets is hard...



I think you are missing the point. saying that the DJIA is up when the USD has dropped considerably is a bit like printing more money to pay your overseas creditors.

Eventually pensioners wil be drawing on their USD denominated stocks and trying to buy products made from somewhere else. bananas shipped from Haiti. they might be shocked to discover that these banans now cost $10USD due to devaluation of their currency.

Currency value matters in this 'Free Trade' world... if the USD hasn't 'recovered' in the last 4 -5 years.. what makes you so sure it ever will?