A great deal of “information” can be described quite properly as “noise.” It repeatedly has proven to be worthless.
Our economy gorges on a daily diet of supposedly important economic data. Many of the statistics emanate from our government, which manipulates the numbers for its own political purposes. Much of that material is revised in subsequent weeks, but the revisions rarely have as much coverage as the original figures.
Some investment firms write utter nonsense. For instance, Blackmont Capital, a Toronto investment firm, recently wrote. “In addition to illustrating the ABS (asset-backed securities) and CDO (collateral, debt obligations) structures, present a simplified CDO square root of 2 (CDO 2) i.e. in which the core collateral typically consists of the mezzanine tranches of multiple CDO structures. With the supporting cash flows required to flow through multiple ABSs and then multiple CDO structures, it comes as no surprise that the level of leverage available to investors at the CDO 2 level, is, in effect, exponential compared to underlying core ABS level. Offsetting the expanded leverage, investors in CDOs get a much, broader collateral diversification as the collateral typically consists of the mezzanine tranches of upwards of 50 first order CDOs, etc.”
Does anyone know what that means, and, if so, is it useful information?
Then too Dresdner Kleinwort, a highly regarded investment bank, found that the average forecasting error on predictions was 42 per cent over 12 months, and 95 per cent over two years. The Toronto Globe and Mail surveyed the leading buy recommendations of prominent analysts and compared them to their list of sell recommendations.
It turns out that the latter, the sell recommendations, outperformed the list of purchase suggestions.
Additional information clearly does not lead to better directions. An investment group, Legg Mason, cited a study revealing that the success of predictions was actually worse when given 40 pieces of information than when given five.
In the face of literally a torrent of information, it perhaps is to be expected that some rely on whom they know rather than what they know. Then too, an academic study found that U.S. fund managers are more likely to weigh their portfolios in favour of shares in companies in which senior officers went to the same university as they did.
All of that confirms what most experienced economists know. One must depend on plain, ordinary common sense, ignoring a great deal of the worthless information that is presented.
