Market Movements Always Need a Reason

Three things bothered me about this article about the Hang Seng selling off one day.

First, why does there always have to be a reason for the market to sell off?  The headline template apparently says, "The Market Dropped XXX% because of YYY reason."  It's never just "the market dropped because people sold some things" or "the market sold off because people have made plenty of money and are just looking to take some profits."  

No, there has to be a very specific and tangible reason.  It has to be because of nervousness about the Fed, or a movement in the dollar, or some geopolitical event, or because the movement in one specific stock just made everyone nervous.

In reality, sometimes stocks just move.  People buy and sell for lots of different reasons.  And attributing a market's movement to one particular cause is rarely accurate.

Second, the article cites about thirty different potential reasons for Hong Kong stocks to have sold off that day.  If we're coming up with that many potential reasons why the market sold off, then we're probably not sure what exactly caused the selloff! 

To be clear, I mean no offense to any of the interviewees in the article.  If a reporter called me and asked me why the market was down two percent, I'd try to come up with some reasons for sure.  And there would be absolutely no way to be certain if anything I said was indeed the key reason why stocks were down that day.

This is an example of narrative bias, where we tend look for a simple explanation to provide a cause/effect relationship for something we observe.  As humans, we love the simplicity of "stocks sold off because of Fed fears."  At the same time, we despise the complexity of "stocks sold off for a multitude of reasons and potentially just a confluence of inconsequential reasons from which we can't really draw any meaningful conclusion."

Finally, since when does a drop of less than 2% constitute a "plunge"?  That, my friends, is what a low volatility environment sounds like.


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