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“Breaking News” and… Breaking Noise

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Abstract

As real-time news updates and analysis have become widely available, one has to rethink the effect of noise on news. Noise has the fundamental property of becoming dominant over short periods of time. As a result, many “breaking news” stories may appear more exciting and important that what they really are. Overreacting to real-time news can have inherent costs that are analogous to the cost of financial options, as the cost of the latter is the sole result of acting (trading) on short-term noise (stock volatility). Understanding the dynamics of noise and appreciating its effect on short-term developments can be quite valuable in our times of ubiquitous access to real-time news flow.

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Notes

  1. \( \sqrt{0.1} \) is three times bigger than 0.1, while \( \sqrt{0.01} \) is ten times bigger than 0.01.

  2. More formally, the speed of change due to noise over a time horizon Δt would be \( \sigma \sqrt{\varDelta t}/\varDelta t=\sigma /\sqrt{\varDelta t} \), which becomes ever increasing as the time horizon Δt decreases.

  3. As financial instruments that protect from losses in risky investments, options are fundamentally relevant to human loss aversion when acting under uncertainty (Kahneman and Tversky 1984) and, thus, to our reaction to real time news. In financial derivatives jargon, both options and human loss aversion exhibit "convexity" (Hull 2011), i.e. they have a nonlinear payoff function with respect to the underlying risk factor.

References

  • Hull, J. C. (2011). “Options, Futures, and Other Derivatives”, Prentice Hall.

  • Kahneman, D. and Tversky, A. (1984). “Choices, Values, and Frames”. American Psychologist 39(4), 341–350.

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  • Kahneman, D. (2011) “Thinking, Fast and Slow”, Farrar, Straus and Giroux.

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Authors and Affiliations

  1. Global Markets, Eurobank, 8 Othonos Street, Athens, 10557, Greece

    Kostas Tsiveriotis

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  1. Kostas Tsiveriotis
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Correspondence to Kostas Tsiveriotis.

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Tsiveriotis, K. “Breaking News” and… Breaking Noise. J Knowl Econ 6, 28–30 (2015). https://doi.org/10.1007/s13132-013-0164-5

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  • DOI: https://doi.org/10.1007/s13132-013-0164-5

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