Streetwise

Lauren Rudd

Sunday, June 6, 2010

Don't Drink Farrell's Kool-Aid - No Apocalypse Now

The First Amendment is a wonderful thing. It means you can go off half-cocked blathering prose that is tantamount to carrying a sign saying, “Repent now, the world is coming to an end.” The difficulty arises when you prattle under the auspices of a name still envisioned by some as a standard bearer in business media, albeit one that has become considerably more conservative of late.

I am referring to a recent article by Paul B. Farrell on MarketWatch, an online news service owned by Dow Jones. Although Mr. Farrell’s comments were, in my opinion, utter lunacy, I was intrigued by the legitimacy bestowed on them by the Dow Jones moniker.

A modicum of research made it abundantly clear that only through unadulterated luck did Mr. Farrell’s nonsensical prognostications previously escape my consideration. However, I am familiar with his brand of “scare ’em silly” journalism. Putting his continual repetition of tired clichés aside, Mr. Farrell’s writing has a dangerous facet, one that could be detrimental financially to those who drink his brand of Kool-Aid.

Specifically, Mr. Farrell guides you to a mindset whereby you believe he is about to reveal the details of a cataclysmic collapse. Then at the last moment he suddenly backs away, leaving it to your imagination to take that final step as you conjure up images of potential disaster. From there it is an easy slide downhill to utter panic.

For the lead-in to his May 25 article, Mr. Farrell writes: “Game's in the refrigerator. Power is turning off. Dow sinking below 6,470.” Yet, the closest he comes to adding any substance to that statement is, “...only a fool would bet with Wall Street.”

At the end you are left with his profound summary: “The clock's flashing. Huge point spread. Think bear, think crash, think end of capitalism, think Great Depression II...This is no buying opportunity, this game's in the refrigerator, call it.”

Robert Frank, an economics professor at Cornell University, recently pointed out that textbook economic models assume people are well informed regarding the options they are considering. It is a poor assumption, as most economists will readily admit.

Therefore a slightly weaker assumption is often employed, one that says individuals respond in approximately rational ways to the information available. Behavioral research now challenges even that more limited claim because patently false or irrelevant information often affects people’s choices significantly.

The manner in which transparently irrelevant information affects behavior was demonstrated by two psychologists, Daniel Kahneman and Amos Tversky. As an experiment, they had subjects spin a wheel that supposedly would stop at random on any number between 1 and 100. The subjects were then asked what percentage of African countries belonged to the United Nations.

For one group the wheel was rigged to stop on 10; for a second group on 65. On average, the first group guessed that 25 percent belonged to the United Nations, while the second group guessed 45 percent. All the subjects would have insisted, correctly so, that the number on the wheel bore no relation to the question’s correct answer.

Nonetheless, the number profoundly influenced the responses given. In short, even demonstrably false or irrelevant information can influence both your judgment and your decisions. Politicians are well aware of this weakness in people. Having a doctorate in psychology, I am sure Mr. Farrell is also quite familiar with the concept.