Gur Huberman writes:
Apropos your blogpost today, here’s a piece from 2001 that (according to a colleague) shows that I can write an empirical paper based on a single observation.
Gur’s article, with Tomer Regev, is called “Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar” and begins:
A Sunday New York Times article on a potential development of new cancer-curing drugs caused EntreMed’s stock price to rise from 12.063 at the Friday close, to open at 85 and close near 52 on Monday. It closed above 30 in the three following weeks. The enthusiasm spilled over to other biotechnology stocks. The potential breakthrough in cancer research already had been reported, however, in the journal Nature, and in various popular newspapers—including the Times—more than five months earlier. Thus, enthusiastic public attention induced a permanent rise in share prices, even though no genuinely new information had been presented.
They argue that this contradicts certain theories of finance:
A fundamentals-based approach to stock pricing calls for a price revision when relevant news comes out. Within this framework it is experts who identify the biotechnology companies whose pricing should be most closely tied to do the price revision. These experts follow Nature closely, and therefore the main price reaction of shares of biotechnology firms should have taken place in late November 1997, and not been delayed until May 1998.
I’m not going to disagree with their general point, which is reminiscent of Keynes’s famous analogy of stock pricing to a beauty contest.
Huberman and Regev quote from the Sunday New York Times article that was followed by the stock rise:
Kolata’s (1998) Times article of Sunday, May 3, 1998, presents virtually the same information that the newspaper had reported in November, but much more prominently; namely, the article appeared in the upper left corner of the front page, accompanied by the label “A special report.” The article had comments from various experts, some very hopeful and others quite restrained (of the “this is interesting, but let’s wait and see” variety). The article’s most enthusiastic paragraph was “. . . ‘Judah is going to cure cancer in two years,’ said Dr. James D. Watson, a Nobel Laureate . . . Dr. Watson said Dr. Folkman would be remembered along with scientists like Charles Darwin as someone who permanently altered civilization.” (p. 1) (Watson, of The Double Helix fame, was later reported to have denied the quotes.)
And more:
In the May 10 issue of the Times, Abelson (1998) essentially acknowledges that its May 3 article contained no new news, noting that “[p]rofessional investors have long been familiar with [ENMD’s] cancer-therapy research and had reflected it in the pre-runup price of about $12 a share.” . . . On November 12, King (1998), in a front page article in the Wall Street Journal, reports that other laboratories had failed to replicate Dr. Folkman’s results. ENMD’s stock price plunged 24 percent to close at 24.875 on that day. But that price was still twice the closing price prior to the Times article of May 4!
They conclude:
To the skeptical reader we offer the following hypothetical question: What would have been the price of ENMD in late May 1998 if the editor of the Times had chosen to kill the May 3 story?
I feel like the whole Nobel prize thing just makes everything worse (see here, here, here, and here), but I just wanted to make two comments regarding the effect of the news story on the stock price.
First, the article appearing more prominently in the newspaper does provide some information, in that it represents the judgment of the New York Times editors that the result is important, beyond the earlier judgment of the researchers to write the paper in the first place, the journal editors to publish the article, and the Times to run their first story on the topic. Now, you might say that the judgment of a bunch of newspaper editors should count as nothing compared to the judgment of the journal, but (a) journals do make mistakes (search this blog on PNAS), and (b) Nature and comparable journals publish thousands of articles on biomedical research each year, and only some of these make it to prime slots in a national newspaper. So some judgment is necessary there.
The second point is that, yeah, James Watson is kind of a joke now, but back in 1998 he was still widely respected as a scientist, so his “Judah is going to cure cancer in two years” line, whether or not it was reported accurately, again represents additional information. Even professional investors might take this quote as some sort of evidence.
So I think Huberman and Regev are leaning a bit too hard on their assumption that no new information was conveyed, conditional on the Nature article and the earlier NYT report.
The first link is broken.
This time, after my demonstration of terrible reading comprehension yesterday, I have doublechecked that the link does, in fact, lead to a 404 error, and that it’s not a simple issue of an extra / or . .
I get a 404 error from your link as well as the original one. Perhaps these are not independent events….
Link fixed; thanks.
“I can write an empirical paper based on a single observation”
It is indeed possible to write a legitimate empirical paper based on a single observation, but only under very specific circumstances:
https://en.wikipedia.org/wiki/Natural_nuclear_fission_reactor
Basic radioactive decay is not a subject of debate.
Off topic a bit, but the Okla natural nuclear reactor stands as a strong counterargument against any and all forms of scientific postmodernism, and it is the first thing I think of when I read a postmodern opinion about science.
Whoops Oklo.
The Oklo reactor is interesting, but I’m not following how it is a counterargument against scientific postmodernism.
“I’m not following how it is a counterargument against scientific postmodernism.”
Here is the second sentence in the Wikipedia definition of postmodernism:
“Claims to objective fact are dismissed as naive realism,[5] with attention drawn to the conditional nature of knowledge claims within particular historical, political, and cultural discourses.”
AFAIK nothing about the Oklo reactor is in dispute by anyone who knows the basics of radioactive decay. This is not in any way “cultural discourse.” If the only way to sustain your postmodern paradigm is to know nothing about the topic, you don’t have much of a paradigm.
Stepping out of this rabbithole…
Matt –
> If the only way to sustain your postmodern paradigm is to know nothing about the topic, you don’t have much of a paradigm.
I think there might be a problem with you’re inclusion of scientific in “scientific postmodernism,” as I think scientific postmodernism wouldn’t imply knowing nothing about the topic.
To me, scientific postmodernism would be something more like this:
The postmodern perspective on science was shaped further by the theory of Thomas Kuhn. He rejected concepts of science as a disinterested search for objective knowledge, or as an independent, non-partisan exploration of truth governed by a specific ethos.
Which is more nuanced than your portrayal.
https://areomagazine.com/2016/11/30/post-modernisms-troubled-relationship-with-science/#:~:text=The%20postmodern%20perspective%20on%20science,governed%20by%20a%20specific%20ethos.
If the same site was found in 10k years (and they still knew about our civilization), it would probably be explained as an ancient waste depot or destroyed power plant.
The best interpretation of the data depends on the wider context.
This seems typical to me. It usually takes the news/markets 6-24 months to figure things out (to the extent a correct understanding is even arrived at). Guessing this is way harder than applying expertise to picking stocks.
I looked for such replications the other day and didn’t find any published. Perhaps they got file drawered.
Either way, it wasn’t realistic to think a 90% reduction of tumors in mice after 2 weeks would correspond to a cure for cancer. It *could be*, but is probably a minor decrease in rate of growth (ie, the patient dies after 24 months rather than 20). They just happened to time their snapshot of the growth curves just right, so it looked very promising.
“A fundamentals-based approach to stock pricing calls for a price revision when relevant news comes out. ”
It is true that stock prices revise when new information emerges. The fact that there are aberrations in microcap stocks is irrelevant. To put in in Andrew-friendly context, claiming that this case means that information isn’t priced into the market is like someone who claims that because his uncle is a 95yr old smoker, smoking isn’t harmful.
Microcap stocks comprise the bulk of companies but are of miniscule value in the total market. The “rule” that markets price in information is subject to the scale of the company. The farther down the capitalization chain one travels, the greater the deviations can be.
Also: it’s nice to model that every bit of information is immediately definitive and the full future impact of that information for the near and distant future is immediately obvious. Unfortunately, as we see at the moment, it’s taking markets a while to price in the effect of inflation / higher interest rates; an administration intent on driving up the cost of energy and strongly pro union; and the threat of broader war from Putin. These things are hard to gauge, and not surprisingly the market is struggling to incorporate them.
Chipmunk:
I agree with your general point that aberrations can happen when markets are thin (and I appreciate your use of the Andrew-friendly analogy). Let me just say that there is a mode of reasoning frequently used in which stock prices are held to capture current value at all times, and where people argue that any relevant information has already been reflected in the stock price—this is the sort of reasoning being alluded to in the famous joke about the economist who sees the $20 bill on the sidewalk—and that is what Huberman and Regev are reacting against in their article (even if, as I explain in my above post, I disagree with them on the specifics because I don’t buy their claim that the NYT article offered no information to potential investors).
Glad you liked the analogy! It illustrates a point but OTOH health effects of tobacco and price effects of news about stocks aren’t really analogous. Ultimately, the causes of tobacco related illness are deterministic, but the effects of news on a stock won’t ever be known.
But dig this bit from the conclusion of Huberman and Regev:
“The very prominent and exceptionally optimistic Sunday New York Times article of May 3, 1998, enables us to document a very strong, and permanent rise of ENMD’s stock price that was caused by no new news.”
This statement is false! :) The mistake Huberman and Regev make is an implicit claim that the only information allowable as “news” is the performance of a drug on a test.
The NYT article provides an “optimistic take” on the test: that’s real “news.” The fact that the NYT is covering it for a second time is also “news” – someone believes it warrants repeated coverage! And the placement of the article is also “news” – less important information is on the back page. More important information is on the front page. We all know there are experts who have beliefs about certain drugs. Regardless of the test, what the experts *believe* is news. All of the aspects I’ve listed above are proxies for this expert belief.
Hey! This fits right into your post today! The news of the performance of the drug on a test could be viewed as “positive” or “negative”, and thus it has a discrete value. OTOH, the value of the “optimism” expressed in the NYT article is open to interpretation and thus can be expressed along a continuous scale, 0-??. There you go.
Chipmunk:
Agreed. That’s the point of my post above: the NYT article with the Watson quote did indeed represent news.