Nov 212008

Is information technology accelerating the wild swings in the market?

Oil barrel prices, thought to cross over $200 are now around $50. The stock market jitters 5% – 7% in a day looking like warmed-up jello. The talking heads on TV are talking with more emotion and I can see their veins popping on my high definition TV. Watching the stock market, I get the sense we are behaving like a large flock of birds. At the first sign of any perceived threat and the lead bird takes off and the whole flock blindly follows.

The whole world is joined together in a synchronous flow of information, made possible via the information technology of the past decade. We are all jumping up and down at the same time in our small pool making larger and larger waves and splashing water all over the place.

Would we be better off if we weren’t so connected?


  4 Responses to “IT-Enabled Synchronous Psychosis?”

  1. “Not so connected”? I wonder, if this statement originates in frustration or philosophy. . .

    Would it really make any difference for the markets if the medium were the telephone or the ticker vs. the internet? Part of the reason that the “trading floor” exists is that the “connectedness” was necessary to the market.

    IT is important; but, we shouldn’t exaggerate its importance.

  2. avatar

    Ahhh …. a couple of decades ago I proposed that Apple would be the cause of market excesses …. because it allowed every man woman and child the opportunity to run the same analysis software… and therefore take the same actions at the same time. I called this the “lemming effect.”

    So I don’t think it’s the “connectedness” at all …. I think it’s the application of the same decision tools by everyone. Sort of a Mapquest to investment decisions, but used by everyone at the same time.


  3. avatar

    Frank: yes, you are right we shouldn’t exaggerate the importance of IT in the case of the trading floors. I checked the largest volume day in the crash in the autumn of 1929. The market dropped 48% from Sept. 3 to Nov. 13. Biggest trading day was 16 million. This year, the drop was 36% (Aug. 28-Nov 20), but the volume was 11.5 billion. Similar drop, similar time period, but… IT has enabled 718X the volume.

    I was referring to more of what Bob probably said better than I did. I am referring to the widespread sharing of all sorts of information across the globe via modern communication tools.

    Bob brings up a good point about the same decision tools yielding yielding the same decisions. I guess when you look at the 1929 volume and the 2008 volume, the difference is IT enables a lot of lemmings to move at the same time. Clearly the lemming effect took place then too (for this time period).

  4. avatar

    I think you’re coming dangerously close to insulting birds. They move with intelligence and grace; people, not so much.

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