Triangles
Watch the shapes. Then say what happened.
Three shapes move round a box for twenty seconds. Tell us what went on between them. Then watch one day on the stock market and tell us why it moved.
Why you saw a story
In 1944 Fritz Heider and Marianne Simmel showed people a film two and a half minutes long. In it a few plain shapes moved round the screen in different directions at different speeds. Asked what they saw, the viewers gave detailed accounts of what the shapes wanted and what they were like. The big triangle came across as a bully. It chased the other two until they tricked it and got away.
Our film has even less in it. The code has no bully, no chase and no plan. Each shape gets a small random nudge every frame and keeps a little of its last move. Even so, in most of these films the big triangle closes in on one of the others while that one moves away, for long enough to look like a chase. The red marks show where that happened in yours.
A brain that sees a mind behind every movement makes a cheap mistake when it is wrong. A brain that misses a real predator makes an expensive one. So we come built to see intention, and we see it in shapes on a screen too.
The same game in a trading room
Every evening the market wrap gives the day's move a cause. Stocks fell on rate worries. Stocks rose on hopes for a deal. The move comes first and the reason is found afterwards.
David Cutler, James Poterba and Lawrence Summers tested how much of the stock market's movement news can account for. They found it hard to explain more than a third of the swings in returns from economic news. They also found that large moves often came on days with no major news anyone could point to.
The chart you just explained had no news in it at all. It was a walk of random minutes. A trader who needs a reason for every wiggle will always find one, and will trade on a story that the market never told.
When you see a reason, ask: would I have seen it in noise?
Sources
- Fritz Heider and Marianne Simmel, "An experimental study of apparent behavior", American Journal of Psychology 57 (1944), 243–259.
- David M. Cutler, James M. Poterba and Lawrence H. Summers, "What moves stock prices?", Journal of Portfolio Management 15, no. 3 (1989), 4–12. Also NBER Working Paper 2538 (1988).
- The film and the trading day are made fresh in your browser. Each shape takes a random nudge every frame and keeps most of its last move. Each trading minute is a random step with no drift. If a day ends within 0.3% of the open we deal another, so there is a move to explain. A chase is any stretch of ten frames or more where the big triangle is close to another shape, moving toward it, while that shape moves away.