One arena where information cascades can have drastic effects in the stock market. As the year began, it appears that the economy is slipping into recession. The first 5 days of 2008 was the worst start in the S&P 500’s history—the index fell over 5%. The January 21^st Financial Page in the New Yorker magazine by James Surowiecki explained that the reasons for all of the selling were decisively clear: the dismaying labor market report from the month of December showing job growth and unemployment rate.

Surowiecki notes that despite knowing that employment statistics are not generally very reliable, Wall Street’s response was quite clear. The two reports are based on very different surveys and sometimes show different results. Surowiecki reports that in December the job growth report showed an 18000 job increase, but the unemployment rate showed a sharp increase in the number of people without jobs. Both of these measures are very imprecise, with sampling errors on the magnitude of hundreds of thousands.

Now here comes the information cascade. How do you decide to buy or sell with these two conflicting, but both imprecise figures? To further confuse the ordinary person, critics often dismiss the labor market report as meaningless or irrelevant, but investors (as shown in the first few trading days of 2008) seem to embrace them. Each of these variables can add to the signal that the traders receive and thus influencing their decision. One must weight each number as well as the choices of others to make their decision. Albeit, as Surowiecki says, that people are don’t have intuitive understandings of margins of error and prefer to look at a single number, even if it is wrong. From this, it can be implied that ordinary investors probably tend to not look at the numbers as much as they care about the choices of other traders. As Surowiecki mentions in the close of the article, “the market is locked in a hard to break feedback loop: the fact that traders act as if the jobs report were definitive makes it so.” Is it possible to break this loop and end the cascade toward recession?

Perhaps the solution to this is to get more reliable numbers for the labor reports, or have a different strategy for reporting the health of the economy other than job growth and employment rate. Understandably, this would be expensive and time consuming to do, but it might change how investors interpret and act upon data and stop the cascade.  In the end, it must be decided what is more important:  spending money now, or face the possible effects of a standstill economy.