Writing about short-term stock price movements
by Chris Roush
Tim Worstall of Forbes.com writes about a writing technique used by some business journalists when covering daily stock price changes.
Worstall writes, “A little insight into the way that a certain form of financial journalism works. The financial journalism that talks about short term movements in prices on markets that is. In this case, the fall in Apple‘s share price on Friday.
“Here’s what we get told up at the top:
Apple Inc shares fell 3.9 percent on Friday after the iPhone 5 debuted in China to a cool reception and two analysts cut shipment forecasts.
“OK, note the ‘after’ there. We’re not actually directly being told that Apple share fell because of the analysts or the cool reception. But everyone will take it as actually meaning that.
“And that’s not how share prices actually work. The best description from the academic literature is as a ‘random walk.’ Sure, over the long term, share prices are indeed driven by real events. Apple’s the world’s most valuable company because it’s one of the most gargantually profitable. Over periods of months or years stock markets do get prices around right. But over hours or days, just not so much. All of the academic research says that these very short term movements really are just random. So on a particular day a few more want to sell than buy: the price goes down. A couple of days (hours, seconds?) the reverse is true and the reverse happens.
“However, we humans are story telling creatures. And where there isn’t one we’ll invent one so that we can make sense of the world. Things just happening doesn’t suit our worldview: so share prices don’t move based upon the animal instincts of investors. There has to be some news, a story, to have made them change their minds and thus prices.”
Read more here.