In his book The Black Swan, Nassim Taleb heavily references the narrative fallacy which represents the human tendency to construct stories around facts, regardless of how the story changes the interpretation of the facts, and regardless of whether the final story is true. In some cases the story actually distorts the facts. For more information, I strongly suggest reading the book, its worth it.
I suppose I can thank (or curse) Nassim for explaining the narrative fallacy to me because now it appears in my everyday life. I don’t generally look for it, but my awareness of it makes it stand out like porn: you know it when you see it.
Now I don’t claim to be perfect when it comes to my economic and financial blogging, and I am sure I have made mistakes. I am also sure that I have misinterpreted facts, and maybe even misquoted them on occasion. But after all, I’m one guy with a day job, no editor and a wife who’d prefer I spend less time doing this anyway. And I don’t get paid to do this, ergo read what I write with a grain of salt. However, when I read stories from paid writers on mainstream financial news services I expect a basic level of understanding economics and finance and at least a strong editing process. Lord knows I could use a good editor!
In any event all this brings me to an excerpt from a Bloomberg article I just read, an article written by Eric Martin, poor Eric. The problems I have with the article are in the passages below. For the record while I am only pasting a section, I am not contextualizing this just to pick on Eric, I don’t know him at all, and nothing prior to this passage or after this passage serves to correct these errors or narrative fallacies.
The S&P 500 slipped 2.3 percent to 825.88 to complete a fourth straight weekly drop, its longest losing streak since July. The Dow Jones Industrial Average fell 148.15 points, or 1.8 percent, to 8,000.86. The Russell 2000 Index of small U.S. companies declined 2.1 percent.
Benchmark indexes opened higher after the Commerce Department said gross domestic product contracted at a 3.8 percent annual pace in the fourth quarter, less than the 5.5 percent estimated by economists in a survey. Still, the report showed that a buildup of unsold goods helped pare the decrease in gross domestic product.
“It was still a pretty poor report,” said Jeffrey Kleintop, chief market strategist at LPL Financial in Boston, which oversees $233 billion. “If prices hadn’t been falling so dramatically, we would have seen an even worse number.”
Yeah, and if you had proofread your own comments I wouldn’t be blogging about it. So sure, yes, here Eric is quoting a narrative fallacy from Jeffrey Kleintop, so this empty statement is not his own. Regardless, reading that passage invoked the old expression: “if my aunt had balls she’d be my uncle”. The facts are that 1. prices fell and that 2. the economy slowed less than expected. Right? Those are the facts, nothing more, nothing less. Reorder them if you like, make sentences out of them if need be, but please avoid linking them, and definitely avoid adding an arbitrary narrative or causation.
The narrative fallacy here is simply filler for a guy who really has nothing to say, or maybe two guys who have nothing to say. I’m sorry, I don’t know Jeffrey at all either, which probably makes me the ignorant one here since his current employer, LPL Financial, describes him as “‘Wall Street’s Best and Brightest’ and his market commentary is regularly sought out by national print media and business television and radio.” However I just can’t believe that this was a quote worth passing along. And if that gem was not enough to set me off, it was back to back with this piece of pure frontier gibberish.
Unadjusted for inflation, GDP shrank at a 4.1 percent pace, the most since the first three months of 1958. The drop in so- called nominal growth explains why corporate profits slumped as the year ended.
Please, please, just take a moment before I highlight this one. Read it again, and if that don’t work, read it another time. Have you spotted what’s wrong with this one? Ok there are two, but one is silly.
The real problem I have with this statement is the implication that the “drop in so-called nominal growth” is cited as causation for why corporate earnings (profits) slumped. !@#$^&*!!!
Dude, I am pretty sure that this is Econ 101. The fall in GDP did not cause profits to slump. Slumping profits were ultimately a component of the final GDP calculation. Apparently Eric now thinks GDP is a leading indicator of economic activity. Man, if this is the trash that gets you to become an acclaimed financial author then please sign me up. Really, if we have to sift through shit like this to get the news then we are all going to die young.
Ok, and I promised a small bone to pick too. Why the use of “so-called”? It makes it sound like we should doubt the use of the word nominal. It’s kind of like a so-called friend who wrecks your car but never offers to pay for the damage. To be fair to young Eric (I have no idea how old he is, but if he is asking us to question the use of the word nominal next to GDP, then I am just going to assume he is still in his 20’s) “so-called” does have two distinct definitions:
1 : commonly named : popularly so termed <the so–called pocket veto>2 : falsely or improperly so named <deceived by a so–called friend>
The first definition supports his use since nominal GDP is a popular term, however I think most people would agree that the colloquial use is the latter, creating an element of doubt or distrust. I don’t know, maybe I’m old fashioned, OK I am old fashioned, but it doesn’t seem prudent for a financial reporter to refer to nominal growth in a manner that will generally construe that we are now questioning the basic diction of economics.
Sure we can question the mortgage market, the investment banks, the regulators, the Bush administration, greedy homebuyers, hedge funds, Bernie Madoff and even economists, but should we really question that pesky term “nominal GDP”?
But I digress.
Merriam Webster, Accessed January 30, 2009
LPL Financial Services Appoints Jeffrey Kleintop, CFA, Senior Vice President, Chief Market…
Business Wire, March 27 2007, Accessed January 30, 2009
U.S. Stocks Drop, Capping Market’s Worst January, on Economy
Eric Martin, Bloomberg, January 30, 2009