The synchronicity of stock traders

In recent years, sociologists have produced a number of interesting works regarding the behavior of economic insiders. In a recent study published in the Proceedings of the National Academy of Sciences, the authors argue that stock traders have fairly synchronized behavior:

Sociologist Brian Uzzi of Northwestern University in Evanston, Illinois, and colleagues analyzed all trades taking place in a single firm of 66 employees over 2 years. As is usual in trading firms, the employees specialized in different markets—housing, autos, or health care, for example—so they had no obvious incentive to copy one another’s behavior. Each trader typically bought or sold stocks about 80 times a day, which the researchers allotted to second-long time windows.

A 7-hour working day is roughly 25,000 seconds, so the chance of one employee’s 80 trades randomly synchronizing with any of his colleague’s is small. Yet Uzzi’s group found that up to 60% of all employees were trading in sync at any one second. What’s more, the individual employees tended to make more money during these harmonious bursts…

This is interesting information in itself: there are common patterns to behaviors in which we might typically assume that traders act on their own. But perhaps the more interesting aspect of all of this is why these trader’s actions are so synchronized. Here is what the authors suggest:

They believe the synchronized behavior is simply a general indicator that the market is ripe for safe trading. Although each individual trader has a short-sighted view of his or her specialist market, the traders’ collective monitoring of events in the outside world means that, at some point—indeed, at 1 second—group instinct prompts many of them to buy or sell together. The researchers found that instant messaging among traders spiraled at times of synchronicity, which seems to support this view. Trading out of sync, Uzzi says, would mean the trader misses out on the time when the market information was optimal for a return.

So even with specialized tasks, these traders are then monitoring broader conditions and responding to group behavior. This seems to fit with other sociological research that suggests that economic decisions that often get chalked up to things like rationality or intuition are influenced by social factors.

There is an intriguing implication as well:

Uzzi thinks trading firms could capitalize on the phenomenon by giving their employees more money to trade when they are in sync. But he warns that the traders themselves must never be told about the decision. “It is well-known that once people become self-conscious of their own behavior, their behavior changes,” he says.

So will behaviors (and outcomes) change if this article becomes common knowledge amongst traders?

Discussing acceptable risk and gun deaths

One of the larger issues brought to light by the Arizona shootings is whether Americans want to risk the possibility of such an event occurring in the future. One commentator considers the trade-offs that might exist in limiting the risk of gun violence:

RealClearPolitics analyzed the most recent United Nation’s data to better understand American violence. The assault rate in Scotland, England, Australia and Germany is more than twice the US-assault rate, at times far more. Yet the US-murder rate is at least four times the rate of these developed nations. America’s murder rate ranks 53 among 153 nations. No other developed nation ranks within the top half. The comparison between assault and murder rates is rough; an assault is not always reported or discovered. Both rates are, however, based on criminal justice sources from 2003 to 2008. And the comparison, for all its imperfections, captures an important fact: Americans are not exceptional for their violence but exceptional for their extreme violence–murder.

American violence has known far worse days. In 2008, the national homicide rate reached its lowest level since 1965. But there are still about 12,000 gun related murders annually. Guns are involved in two-thirds of American homicides. The US firearm-murder rate ranks among third-world countries. It’s about ten times the rate of Western European nations like Germany…

There is an unspoken willingness to tolerate our share of murders. American hyper-capitalism makes a similar tradeoff. We subscribe to social Darwinism to a degree unseen in Western Europe. It’s one reason our economy is the fittest. But it also explains why the wealthiest nation in the world has a weaker social safety net than other developed countries. The conservative equation of freedom: lower taxes and fewer regulations on guns, equals more freedom. Liberals adhere to their own zealous formulation of American freedom. The left has won more civil rights for the mentally ill, but those rights will sometimes risk the public’s welfare.

This is an interesting take on the situation. Whose rights should be protected? Are we willing to risk similar events occurring?

Considering the relative risks might also be helpful. Gun deaths, particularly like those lives taken in Arizona, seem particularly tragic and sudden. In comparison, over 33,000 Americans died in motor vehicle accidents in 2009. Which is the bigger priority: limiting gun deaths or motor vehicle accidents. These sorts of questions are quite difficult to answer and often don’t seem to be part of national conversations.

[Another note: can we really say that “our economy is the fittest”? One index recently named Hong Kong the world’s “freest economy.”]

[A final question: is it strange that this particular violence occurrence is getting so much attention when there are 12,000 gun deaths a year in the United States? I’m reminded of the talk in Chicago in recent years about whether the deaths in poorer neighborhoods were receiving the attention they should from police and politicians.]

How to respond to the demise of Borders

With negative business news about the bookstore Borders, a number of commentators have weighed in with opinions about how to respond. On one hand, Borders is a big box bookstore that helped push independent and smaller bookstores out of business. On the other hand, the demise of Borders suggests that bookstores in general are on the way out in favor of online retailers.

Chicago Tribune columnist Mary Schmich writes about how the closing of the Borders store on Michigan Avenue in Chicago affects the shopping district:

By Saturday, Borders’ marquee Chicago store, at 830 N. Michigan Ave., will be closed for good. And — here’s what I think is the real news — the city’s premier shopping street will be without any bookstore for the first time in decades…

Borders was hardly a landmark on par with the old limestone Water Tower that stands just outside the store’s windowed walls. It had occupied its prime corner for only 16 years, barely a blip in Chicago history.

But 16 years is half an eternity in retail time, and Borders had come to seem as basic to the street as traffic.

Back in 1995, when it opened, spinning through its revolving doors was like stepping into a literary Oz, a unique place that, even though part of a chain, pulsed with ideas, people, cappuccino.

Even people who sniffled that it was killing smaller bookstores — most memorably the cozy shop just up the street run by the legendary Stuart Brent — came for the books and the buzz.

I myself have spent a good amount of time in this store, browsing books and music. This location was a nice change of pace from the typical retail store (clothing, in particular), a place to get out of the heat or the cold, watch people go by on Michigan Avenue, and enjoy browsing.

Instapundit provides a different perspective. After some comments about how Borders leftist leanings might have driven some customers away, Instapundit quotes an email from a reader who cites the irony of people lamenting the end of Borders:

Is this — like much of the newspaper industry — a case of the leftist 20% of the populace chasing a way a lot of potential customers over politics? Or is it mostly just technology and convenience?

STILL MORE: Reader Gary Rice has thoughts on the sudden onslaught of Borders-nostalgia:

Re; Borders…. Wasn’t it just a few years ago that Borders and Barnes & Noble were the bad guys? Corporate behemoths destroying the local independent bookstore with their Wal Mart like pricing models ? Wasn’t there even a Tom Hanks romance movie about this exact subject?

So Amazon comes along with a better pricing model and now we are all supposed to mourn liberal Borders’ demise? It is a wonder these people remember how to read, because they sure can’t remember anything else….

Heh.

A good point: can we lament the end of Borders today after criticizing it for over a decade? Perhaps we can: bookstores could be considered “third places,” a middle location between home and work where citizens could gather to read the news, talk to each other, and shop. I suspect there will always be people who like going to bookstores (I will still enjoy it though I’m not sure I would go out of my way to go there) but perhaps they simply can’t survive on the scale and size of a Borders or Barnes & Noble.

These sorts of strange juxtapositions may one major marker of our globalized and fast-paced economy. Do we want any bookstore or a big box bookstore or an online bookstore or an independent bookstore? People vote with their dollars and visits and within twenty years, the entire landscape can change.

But I doubt we would see the same kind of mourning if Walmart suddenly went out of business in favor of online retailers. There is something unique here about bookstores.

An argument for why we should be hearing more about falling home prices

The last several years have seen many stories published and produced about homes and home values. But Dan Froomkin argues that we should be hearing even more about how home values continue to fall:

You might not know it from reading the news, but the nation’s housing prices are in free fall again…

Despite the fact that the nation is officially in a period of economic recovery, the latest data show that home prices are diving. One recent survey pegged the decline at 0.7 percent per month; another found prices down 5.8 percent between August and October.

One analysis found  home values will likely drop more than $1.7 trillion this year, on top of the $1.05 trillion drop in 2009. That would bring the loss in wealth to $9 trillion since the June 2006 market peak, when the housing stock was valued at about $24 trillion…

Dean Baker, co-director of the liberal Center for Economic and Policy Research, tells me the story isn’t getting nearly as much coverage as it should — if nothing else because “as you see a drop in home equity, you also see a drop in consumption.”…

What that means is that another trillion-dollar loss in housing wealth — something that could easily happen by next fall — translates to $50 billion to $70 billion less consumption; sort of an anti-stimulus.

This is obviously not good news. I wonder what Froomkin would say the value is in having Americans hear this story more often and with more emphasis: would people be moved to act in certain ways, like making requests of politicians to do something or trying to get out of homeownership?

A link is made in this story between home values, consumption, and jobs. So if this is a vicious cycle that involves these three factors, where do we begin in trying to reverse the trend? With tax cuts – or extensions of tax cuts? It sounds like the one issue that would help out the others is jobs. If more people had good-paying and stable jobs, they would spend more overall and some of these issues of home values wouldn’t be as much of a concern.

h/t Instapundit

Trying to understand China’s economy with a lack of statistics

Megan McArdle writes about the issue of a lack of comprehensive data to understand what is happening with China’s economy:

But central planners badly need good, comprehensive data.  Once you limit the autonomy of local nodes to make decisions, you need some sort of massive data set to overcome information loss as decisions move up the hierarchy.

Libertarians often use this to argue against any sort of central planning, but that’s not the point of this post.  All modern economies engage in some level of planning, whether it is monetary policy or infrastructure construction.  It was in response to the problems of managing production during World War I that economists first conspired to create US economic statistics.

The Chinese government is extremely enthusiastic about managing their economy, and they put a lot of thought into it.  But the lack of good statistics on economic performance makes an already near-impossible challenge even more daunting.

It is remarkable to recognize how much data there is out there these days in the United States. And even with all that data, it is often not always clear what should be done – government officials, investors, journalists, and citizens need to know how to interpret the data and figure out how to respond.

What would it take to get comprehensive data in China?

h/t Instapundit

Job outlook: either high-paying or low-paying, few in between

Perhaps adding to the bleak economic outlook, some economists are suggesting that future jobs will fall into two categories: high-paying or low-paying with few jobs in the middle.

This would have implications for the size of different classes within the United States. To have a high-paying job, employees will generally need higher-education or specialized degrees. Having a service job means struggling to make ends meet. In this scenario, what kinds of industries or sectors might provide more middle-class jobs?

One growing political metaphor: the car

Politico examines President Obama’s usage of the metaphor of driving a car to describe the national political scene and handling of the economy. The metaphor has grown over the months and recently included the first mention of “Slurpee” by a President in a speech.

Politicians commonly use metaphors and symbols in speeches. The car is such a part of American life that people can instantly grab onto the implications. What would be the metaphorical response from Obama’s opponents?