i usually don't write about financial market stuff, but periodically i wonder how many people actually pay any attention to the dow jones industrial average.
the people i know who deal in the financial markets don't believe the average represents all that much. that's because while the dow is presented as a reflection of the american market as a whole, it is really only the average1 stock value of 30 publicly traded companies. the dow is over 100 years old and, i guess, date from a time when it simply wasn't possible to calculate an average of all of the stocks on a given market. so instead, the dow was created to serve as a kind of sample of the market.
the problem is that the sample is not representative. to get counted in the dow, the companies have to be doing relatively well. companies that do badly for a sustained period of time get dropped from the dow calculation. and their replacements are always companies that are thriving. in other words, companies that are doing badly are not reflected in the sample, and that produces an upward bias in the dow jones industrial average.
and people know this. that's why other measures of the market, like the nasdaq, are taken more seriously by people in the financial business. so why does the dow still make headlines?
i think it's because of another bias in the system, the bias towards positive financial news. everyone in the market wants the market to do well. they all have an incentive to try to make that happen and part of making that happening is bolstering the public's confidence in the markets. it's like the various "leading indicators" that get reported periodically. as far as i can tell, they're not very good predictors of market performance. in other words, they don't really indicate all that much. but they're talked about as if they do predict future performance, so that generates a buzz that might just effect investor's actions and make the prediction come true.
what's interesting about all this, interesting enough to get me posting about it (even though i'm not all that confident i know what i'm talking about here) is that at the heart of all of this is a lie. it's not a bad lie, but rather a nice friendly lie. a lie for the common good. the lie is that the dow actually reflects the state of the economy and isn't upwardly biased. no one actually utters the lie, but it's implicit in the news the dow generates each and every day. the dow gets reported because there are people who hope that reports of its rise will get people who don't know any better to shift more of their retirement fund into stocks. or maybe just that it will produce subconscious fuzzy feelings for the market even among those who do know better.
no one wants to break the spell, so it's never broken. i can't decide if the adherence of the dow is an example of paternalism or just clever marketing. maybe there's no difference between the two.
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1- okay, okay, it's not really a straight average, but rather a scaled average that uses a divisor to account for stock splits. but still. it's a kind of average.
