Media, Markets and a Razor

18/09/2015

Harry Webster

From our guest blogger, Harry Webster, Development Manager at Strawberry Invest.

Media, Markets and a Razor

Occam’s Razor

Occam ’s Razor refers to the  principle that one should not make more assumptions than are required to explain something- that is, shaving away the excessive and unessential. Alternatively, the simplest explanation is usually the right one.

It is a 14th-century problem-solving principle devised and named after the English friar and philosopher William of Occam.

Why does a 14th-century principle for problem-solving, most often used in science and modelling, seem applicable to the media and financial markets?

Financial markets are complex and interdependent entities, meaning interpretation and explanation of their trends and movements can require sophisticated analysis.

However, this is not always the case; sometimes it just needs someone to say it as it is.

A recent example of this is the media’s reporting of slides on the Western stock markets to the news that China’s economy was slowing down. The news that an economy was deteriorating in one part of the world triggered similarly negative sympathetic reactions elsewhere.

The Western media produced a near constant stream of analysis, articles, blogs, tweets and graphs explaining how the news out of China was driving foreign market tumbles.

The advent of technology has meant that information is freely available to all consumers.

For financial and economic journalists to raise themselves above the crowd they need to provide intelligent, insightful and different analysis.

Unfortunately, this often means journalists are averse to using simplistic explanations or stating the obvious: investors are selling because the value of their investments is dropping, compelling more investors to sell - Occam ’s razor. These sentiments are something real-time surveys of market investors often capture.

It would be false to say episodes such as China’s Black Monday with its global impact can be explained by one metric.

Events such as this do require a high level of explanation and cannot be oversimplified. 

Global economies are interlinked more than ever and to list the variables that can affect the price of stocks would be an endless task.

However, when the media choose to report on events, such as China's Black Monday, it will help in future if they apply Occam’s razor.

In doing so, they can potentially provide greater perspective for long-term investors and reduce the ability for panic to generate momentum.