Regular readers of this site have seen this from me before and can read it on the masthead above: Information is cheap but meaning is expensive. But that wasn’t always the case.
For most of its existence, the investment business was driven by information. Those who had it hoarded and guarded it. They tended to dominate the markets too, because good information could be so very hard to come by. But the inexorable march of time as well as the growth and development of information technology has changed the nature of the investment “game” dramatically. Success in the markets today is driven by analysis — in other words, meaning.
As Clay Shirky has pointed out (based upon Dan Sperber’s Explaining Culture), culture is “the residue of the epidemic spread of ideas.” These ideas are, themselves, overlapping sets of interpersonal interactions and transactions. Thus culture is predicated upon a network consisting of the externalization of ideas (A tells B that “successful investing is…”) and the internalization of expressions (B decides that “successful investing is…”). This network allows for ideas to be tested, adapted and adopted, expanded and developed, grown and killed off based upon how things play out and turn out. Some ideas receive broad acceptance and application. Others are only used within a small subculture. Some fail utterly. All tend to ebb and flow.
That explanation of culture seems directly applicable to the markets, especially since culture itself is best seen as a series of transactions – a market of sorts. If I’m right about this, understanding the markets is really a network analysis project and is (or should be) driven by empirical questions about how widespread, detailed, and coherent the specific ideas – the analysis and application of information (“meaning”) – ultimately turn out to be.
Because there is no overarching “container” for culture (or, in my interpretation, the markets), creating (or even discovering) anything like “rules” of universal application is not to be expected generally, especially where human behavior is part of the game. That would explain why actual reductionism – lots of effects from few causes – is so rare in real life. Thus seemingly inconsistent ideas like the correlation of risk and reward and the success of low volatility investing can coexist successfully. Perhaps more and better information and analysis will suggest an explanation, but perhaps not, and we’ll never be able to explain it all.
“Einstein said he Could never understand it all.”
As information increases – within given markets and sub-markets or within the market as a whole – so will various efficiencies. That means that various approaches and advantages, as the ideas that generate them, will appear and disappear, ebb and flow, over time. Trades get crowded. What works today may not continue to work. As the speed of information increases, so will the speed of market change.
Markets – like culture – are thus “asynchronous network[s] of replication, ideas turning into expressions which turn into other, related ideas.” Some persist over long periods of time while others are fleeting. But how long they persist remains always open to new information and better analysis.
In today’s world, with more and more information available faster and faster, it’s easy to postulate that market advantages will be harder to come by and more difficult to maintain. But an alternate (and I think better if not altogether inconsistent) idea is that the ongoing growth and glut of data will make the useful interpretation of that data more difficult and more valuable.
The ultimate arbiter of investment success, of course, is largely empirical. Obviously, we should gravitate toward what works, no matter our pre-conceived notions. No matter how elegant or intuitive the proposed idea, only results should matter. In our information rich world, those who can extract and apply meaning from all the reams of available information will be in ever-increasing demand. Those who cannot will and should fall by the wayside.
Typical thinking — thinking that should be cast to the dustbin of history — fails to grasp the complexity and dynamic nature of financial markets. Which brings me to my topic today.