stock market

The Stock-Trading Platform in Grand Theft Auto V

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Two interesting posts by Kevin Roose on a mini-game within Grand Theft Auto V: description of the stock trading platform there (which allows the buying and selling of individual stocks in fake companies) and how some fans have decided to manipulate the virtual markets in the game:

To understand what’s happening, a few background data points might be necessary:

• There are two playable stock exchanges inside GTA V: LCN and BAWSAQ. On each of these exchanges, you can buy and sell stocks using the virtual cash you amass during the course of the game. (This cash has no real-world value, but it can be used to buy houses, airplane hangars, and other cool things inside the game.)

• Most of the time, these stock prices appear to move randomly. But in certain missions, your character is given a tip that, due to an in-game event (usually, an assassination of a CEO), a company’s stock is about to rise or fall precipitously. When this happens, you’re supposed to load up on the stock (or its competitor’s stock), kill the CEO, then profit from your trades.

• Rockstar Games, the makers of GTA V, have hinted (but never confirmed) that BAWSAQ, the second exchange, might be dynamic — in other words, it might move in response to the actions of other GTA V players, whose trades feed into a central online database. If thousands of players around the world happen to buy a bunch of guns simultaneously, the theory went, the BAWSAQ might reflect that activity by raising the price of Ammu-Nation stock (Ammu-Nation being the store where guns are purchased).

• There is no penalty for insider trading or securities fraud in Grand Theft Auto.

Neat. Too bad it’s not possible to short stocks in the two markets of GTA V.

Apple Results Distorting S&P 500 Earnings

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Quote of the day concerning Apple earnings from last quarter:

The world’s largest company by market capitalization said on Jan. 24 that profit in the quarter ended Dec. 31 was $13.1 billion, 36 percent more than the average analyst projection, while revenue beat forecasts by $7.3 billion, the most ever. The Cupertino, California-based company single-handedly erased a drop in S&P 500 earnings for the October-to-December period, turning a 4.2 percent decline into a 4.4 percent gain.

(source: Bloomberg)

On Overconfidence and Cognitive Fallacy

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In this week’s New York Times Magazine, Daniel Kahneman, emeritus professor of psychology and of public affairs at Princeton University, writes about the hazards of overconfidence. His piece begins with an anecdote from his days in the Israeli army and then moves on to lambasting overconfidence of professional investors. A lot of the ideas here I was already familiar with, but I liked Kahneman’s conclusion:

We often interact with professionals who exercise their judgment with evident confidence, sometimes priding themselves on the power of their intuition. In a world rife with illusions of validity and skill, can we trust them? How do we distinguish the justified confidence of experts from the sincere overconfidence of professionals who do not know they are out of their depth? We can believe an expert who admits uncertainty but cannot take expressions of high confidence at face value. As I first learned on the obstacle field, people come up with coherent stories and confident predictions even when they know little or nothing. Overconfidence arises because people are often blind to their own blindness.

True intuitive expertise is learned from prolonged experience with good feedback on mistakes. You are probably an expert in guessing your spouse’s mood from one word on the telephone; chess players find a strong move in a single glance at a complex position; and true legends of instant diagnoses are common among physicians. To know whether you can trust a particular intuitive judgment, there are two questions you should ask: Is the environment in which the judgment is made sufficiently regular to enable predictions from the available evidence? The answer is yes for diagnosticians, no for stock pickers. Do the professionals have an adequate opportunity to learn the cues and the regularities? The answer here depends on the professionals’ experience and on the quality and speed with which they discover their mistakes. Anesthesiologists have a better chance to develop intuitions than radiologists do. Many of the professionals we encounter easily pass both tests, and their off-the-cuff judgments deserve to be taken seriously. In general, however, you should not take assertive and confident people at their own evaluation unless you have independent reason to believe that they know what they are talking about. Unfortunately, this advice is difficult to follow: overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.

My only gripe: I believe overconfidence is even more systemic than Kahneman posits. I believe there are overconfident dentists, waitresses, accountants, and engineers. What about you?

You Can’t Explain the Market

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Chao Deng, in his piece “Memoirs of a Market Reporter,” gets it (mostly) right about analysts/reporters trying to explain the short-term movements in the market:

[The] drudgery of writing the market-close story—stocks up on this; stocks down on that—began to make me wonder whether chasing the inevitable day-to-day ups and downs of markets was worth anyone’s time. Some critics say markets reporters must suffer from A.D.D., because short-term fluctuations in stock indices really don’t matter much in the long run. They say it’s absurd to pin a single narrative on spot news involving countless individual decisions, many of them made by robots. Too often, coverage favors one slant if stocks are up and another if stocks are down when, in fact, nobody really knows.

The depressing part is that markets beg for an explanation, and the public desires one. As if an explanation can assuage our fears:

[A] volatile turn in the markets simply begged for an explanation, sending thousands of extra readers my way.

Here’s the kicker: there is no good explanation for why the markets are down today(a must-read piece by Felix Salmon):

As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Trying to put a reason behind short-term fluctuations is ultimately useless. Remember: you can’t time the market. And don’t believe anyone that tells you they can.