How Dangerous is it to Listen to the Noise?

In Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, Nassim Nicholas Taleb mentions that a lot of what we attend to is noise, random variation that obscures information carrying signal. Thus the day to day variation in the stock market average includes a lot of random variation that obscures significant longer term trends. Similarly, the daily news content in the media includes a lot of chaff that obscures the long term political and economic trends that are more important.

There is obviously value in information. Information allows us to make better decisions. There is even work to establish methods to estimate how much we should invest in information. Since it costs money, time and effort to obtain information, and since the returns to efforts to secure information are not uniform, there seems obviously to be a point where it is better to make decisions and accept risk than to keep trying to reduce that risk.

The question Taleb raises in my mind, however, is

How costly is noise?

There is surely a cost of obtaining noise, as we spend money to reach the media that is full of randomness. There is a cost of the effort to filter the signal from the noise, as we spend time trying to figure out what "news" is important and whether observed differences are harbingers of trends or random variations. If I read Taleb correctly, he focuses on the costs of incorrect decisions made when we mistake noise for information: stock transactions that are based on emotional responses to transient changes in market prices, for example. (Did the Bush administration make a series of disastrous foreign policy decisions when they mistook noise for information? When the believed the wrong intelligence, or when they mistook a few terrorist attacks for the beginning of a war?)

I wonder more generally about the social cost to society. We have built industries that exploit our monkey-like curiosity in the unusual, spending and earning untold amounts of money to create and disseminate noise. We then have to strengthen institutions that provide checks and balances to filter out the noise. One of the results is that society responds more slowly to truly important trends and problems than it might. And of course, there is the possibility that there exist synergies among the mistakes made by those fooled by noise. Economic bubbles and crashes cause losses not only to the mistaken investors, but to all of us hurt by their economic consequences. Wars fought in response to misinterpreted intelligence kill people who were not responsible for the decision to go to war.

Check out Nassim Nicholas Taleb's website.