Using Information Momentum to Understand Markets & Economy

By Malay Bansal

A simple concept that is useful in understanding some counter-intuitive phenomena in markets and economy, and looking ahead to the future.

For over a decade, I have used a concept that I have called Information Momentum in my thinking and discussions to explain phenomena in markets and economy that otherwise do not seem completely intuitive. Understanding why something has been different from expected in the past also helps in understanding and looking ahead to what might happen in future.

At its core, the concept is simple and parallels the similar concept in physics. Every physical object has a mass, and if it is moving, it has a velocity. The product of the two is known as momentum. The higher the momentum, the greater the impact that object will have. The higher the momentum, the higher the force required to stop the object from moving or to change its direction.

A somewhat similar concept can be applied to information. In this case, consider the number of people who receive a new piece of information, and can act on it, as equivalent to the mass, and how fast people get this new information as equivalent to velocity. The more the number of people who receive the new information, or the quicker the new information reaches people, the higher the information momentum for that information.

The concept is simple and so are some observations which help apply the concept to understanding market behavior. Somewhat in jest, and continuing the parallel with physics, I have sometimes referred to them as my laws of information momentum. Four of these observations are mentioned below.

First law of Information momentum is that the information momentum will continue to increase with time. This is obvious today. It started increasing with with internet becoming more easily available to more people, first in US and then around the world. Then, each of the following, as it came on the scene, has contributed to a quantum jump in the information momentum: advent of the web (the world wide web), email, blogs, news sites, internet trading, faster connection technologies like DSL replacing old phone dial-ups,  wi-fi connections everywhere, tablets & smartphones with data connection, twitter. This trend will continue and the increase in information momentum will magnify the impact of the other laws.

The second law is that higher information momentum means new information will have bigger impact than in the past. More people acting on a piece of information at the same time means bigger moves in market and possibly more often. A corollary to this law is that higher information momentum can, though will not always, increase volatility and correlation in markets.

 The observations by Bespoke Investment Group on “S&P 500 All or Nothing Days” (days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400) as described in the article All or Nothing Days Becoming More Common Than Uncommon, and as shown in the chart below provide a good example of this over a long period.

Source: Bespoke Investment Group.

The third law is that more information momentum means better decisions will be made. Better decisions will logically lead to better outcomes, which in bigger picture, implies higher probability of higher profits for companies and better growth for the overall economy. All else being equal, the future will be better than the past. This applies at every level including at the level of individuals, companies, countries, local markets, and the entire world’s economy. At every level, decision makers will have access to more specific and detailed information and sooner than ever before. In addition to more detailed information about the specific situation, decision makers will have access to more ideas, viewpoints, opinions, suggestions, and criticisms from a wide variety of people through blogs, comments etc. As an example, in 2008 and 2009, when the economy worldwide was facing a huge crisis, with declining values of mortgage backed securities and other bad assets  leading the biggest banks towards failure, and the government had to announce extraordinary measures like TARP, even people like me were able to chime in with suggestions directly to people at Treasury and Federal Reserve and via articles in New York Times etc (to toot my own horn, I suggested a plan involving public-private partnership – basically the concept behind TALF and PPIP programs announced and implemented several months later. See Solving The Bad Asset Problem or PDF).

It is easy to see that even with all else being equal, the future will be better than the past. But all else is not equal, if you look at things like what developments like search engines have done to personal and business productivity. You can find answers to almost any question you have just by googling it. Think about how Google Earth has changed the real estate businesses, and other similar examples. All of these are reasons to be optimistic about the future.

The fourth law states that since more information may become available with time, decisions will be made later in time, possibly at the last possible minute when they have to be made. At an earlier time, the Just-in-time concept significantly improved productivity in manufacturing. In a similar vein, decisions to act may be delayed till the last minute so as to take advantage of any additional information that may become available (what I call “Just-in-time decisions”).

Future articles will add more laws and give more specific examples detailing the application of these concepts for understanding various market and economic developments and looking ahead to the future (for the first example of application of these concepts, see Why have U.S. Interest Rates Defied Expectations and What Lies Ahead? ).

Note: The views expressed are solely and strictly my own and not of any current or past employers, colleagues, or affiliated organizations. My writings are simply expressions of my intellectual thought process. I welcome comments, observations, examples and any extensions of the concepts above.