Beware of Information Porn

I hope this title doesn’t get the blog blacklisted. I assure you it is perfectly "SFW"!

I’m using "information porn" in a certain way based on an entertaining and informative Bloomberg article about investment firm Dimensional Fund Advisors. The article discusses DFA’s warnings about "investment porn", by which they mean articles that tout some new company or investment as the next big thing. DFA are followers of the Efficient Market Hypothesis, and one of their directors is economist Eugene Fama, a pioneer of the EMH. DFA were among the first fund families to create index funds and promote "passive investing", a sharp departure from traditional active investing, where fund managers try to cleverly pick stocks and other investments that have exceptional value. DFA is almost fanatical about their philosophy and really puts investment advisors through the wringer before allowing them to sell DFA funds. I suppose this can be seen as an example of the EMH applied to marketing; if you have a high value product, the market will figure it out and so you can afford to be picky about your customers. That seems to be their philosophy, anyway, and they’ve been quite successful at it.

Investment porn is therefore material which is exciting and makes you think you’re getting inside information, an inside track and a chance to do well in the markets ahead of everyone else. But it’s basically public information, so you’re deluding yourself if you think this kind of data is really going to give you an advantage.

I’m generalizing this to information porn, which can play a similar misleading role in more general areas of controversy where you are trying to come up with an unbiased view of the truth. Information porn in this sense is data which will supposedly lead you to the truth, often by promoting or arguing for a certain position. But as with the investment porn case, the data is fundamentally public and available to everyone. Once again, you are fooling yourself if you think that relying on this data is going to give you an advantage over the consensus opinion, because that opinion will already have taken this data into account.

This obviously ties into the Majoritarian view, and I want to thank commenter ChrisA for pointing out the connection between Philosophical Majoritarianism and the EMH. From this perspective, arguments and data which support a controversial position are much like pornography, and should be viewed with similar skepticism. (Or consumed with similar eagerness, depending on taste.)

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  • In a financial market you have to worry about whether you are smarter than the average person trading, not that the average person who could trade. That sets the bar very high. When thinking about morality, for example, you just have to worry about whether you are smarter than the average person who forms an opinion. This might be a much easier standard to meet.

  • Correct me if I’m mistaken: in a financial market you have to be smarter than the smartest trader with funds available to exploit your stupidity. A small bias by a large number of traders may be soaked up by a single trader with a powerful computer and a few billion dollars – you can’t just beat the average, you’ve got to beat the best.

  • Maybe one way to think of Idea Futures is to bring the strong results of the EMH to a wider set of issues and to thereby strengthen the majoritarian view.

  • Stuart Armstrong

    It seems the EMH works precisely because high rank investors discover inefficiencies, and exploit them – and this knowledge spreads, other people jump in on the bandwagon, and pretty soon the inefficiency is tiny or gone (LTCM, buying and selling the same stock on different stock markets, etc…)

    But your strong version of the EMH, dismissing all new public info as information porn, seems to imply that no-one can ever spot a trend people haven’t seen in the publicly available data, set up a company to exploit that trend, and then make a fortune. But that has happened and continues to happen.

    But you’re right – “this public info gives me an advantage over the public” is indeed nonsense, but “I can use this public info in a way that gives me an advantage over the public” can be true.

  • Hal, I’m not sure it is quite fair to call idea futures “majoritarian.” The majority may in fact disagree with the market, even if they are not confident enough to “put their money where their mouth is.”

  • Eliezer: You are “approximately correct.” There are a few subtleties worth being aware of.

    Ideally, you want to be “ahead” of the market. You want to get the information, buy first, let the market rally as the information comes widely known, and then sell after the price has risen to fair value. So there are two components: getting in and out.

    In order to open the position, you have to be smarter than the smartest active participant. The assumption being they would have previously pushed the price to fair value ahead of you had they known the information before you. To close the position, you must remember that the market may have modified their views to reconcile to yours and will likely react accordingly. Ideally, here you want to sell to the worst informed because the smart guys may not buy from you. They know the move is over and there is no more upside for them. So there is no rationale to buy from you. So in trading, you want to know what information has already been priced into the market, or not. Its only nascent information that matters. A fact that surprisingly few people grasp. (Such as my retired dad who loves to tell me about his stock picking heroics, I keep telling him he is likely the last to know and is overconfident, much to his amusement).

    A recent example of this is real estate. The least informed (subprime) bought right at the top of the market and were left holding the bag. There were no new “ill informed” buyers for them to sell to and to continue push the market up. The market lost momentum and stalled, causing the momentum buyers to then sell. The market then rolled over. Making the ill informed the last to buy because there was nobody new to sell to. In liquid markets you get what is known as “an outside day.” Which is usually a very bearish technical sign. An outside day occurs when the market opens, the market makes a new local high, it pushes up pushes up, fails to find any new buyers, the dumb money is all long now. Then market then falls off with the close making a new local low. These are rare but on market charts they are visually distinct.

    Bob Schillers book: Irrational Exuberance is a good place to look for further info on these effects.

  • I see an important frequent difference between “investment porn” and “information porn,” in particular with the former the promulgater of the porn is out to make money, to get you to use their fund or advice services, or buy the stock of the company they are touting in which they may have an interest. This puts the advice into even more disrepute and question above and beyond the usual EMH arguments about the info being public and therefore presumably already built into the price to the extent that the really smart insiders who knew this stuff before you saw it thought it was worth building into the price.

    BTW, this does not mean that the EMH is always correct, I am a skeptic and one can find plenty of papers by me on my website (just google my last name, it is the third item up) that make such arguments. The problem is that one can rarely know when it fails, so that effectively one must be very cautious, or really have inside info, in order to go against its standard forecasts.

    Of course with regard to “information porn,” sometimes there is also this problem of extra bias: the advocate of a dissenting idea is trying to raise money from funders or get a paper accepted in a respectable journal or otherwise obtain support that will make them more money or fame or whatever. And, of course, often such motives are going on, especially if the purveyor of the porn is an originator of it or a leading advocate of it. To the extent that it is a more disinterested observer who reports that, “hey, this minority idea really has some merit,” this argument weakens, and there is a difference between the two.

  • I am curious about studies that compare betting markets to other forms of information aggregation, in particular straightforward polling and averaging. I have been hunting through Gallup poll results and other places to try to find data about public predictions that could be compared with existing markets, either financial markets or prediction markets. So far I haven’t found any good examples. Gallup does not very often ask people to make predictions; they more often ask how people think and feel about issues. They ask who are you going to vote for rather than who do you think will win the election.

    I did find some time series of predictions about whether the economy is going to get better or worse, but I can’t think of a futures market to compare that to.

    Betting markets have the property that people who have stronger opinions and/or more money play a larger role. The question is how well correlated this is to correctness. Betting markets also encourage honesty, but for many issues an anonymous poll won’t give people much incentive to lie. Betting markets reward discovery of new information, which polls do not, but it’s not clear that that will by itself cause more accurate forecasts. Overall it is not clear to me how much better in practice a betting market will be than a simple poll.

  • Strange coincidence: I wrote the previous comment yesterday and then I opened a book I had received in the mail earlier that day, and it happens to discuss exactly the issue I raised: polls and averaging versus prediction markets. The book is The Difference, by Scott E. Page, and in chapter 8 he goes into when and why prediction markets would be expected to do better than simple averaging. The results were quite surprising to me, and I need to try harder to understand them. I hope to post a summary soon.

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