The Ups and Downs of Rankings

We can also criticize the phony precision and excessively changeable rankings of the best places-to-live list published by many organizations. The upshot is that colleges and cities don’t really shoot up that much in a year.

What About Your Portfolio?

And this brings me to the stock market and its gyrations and would-be prognosticators. Three of the biggest daily point gains and four of the largest point declines in Nasdaq’s history occurred this past month. The increase in volatility during the last few years has been substantial, though a bit exaggerated. (Our perceptions of gains and losses have been distorted because the numbers are so high. A 2 percent drop in the Dow when the market is at 11,000 is 220 points, whereas such a percentage drop was only 60 points when it was at 3,000 not too long ago.)

The volatility has come about as the media has fixed relentlessly on these numbers. More people than ever have started trading, many of them influenced by inconstant lists of the 50 most beautiful (er ..., undervalued) stocks. IPO’s are still incessantly hyped, spawning, up until a month or two ago, all those jealousy-inducing 20-something billionaires.

Did I use the word jealousy? As with beautiful people and distinguished universities, emotions and psychology are imponderable factors in the market’s skittish variability. Just as beauty and academic quality don’t change as rapidly as our ad hoc lists and rankings, so the fundamentals of companies don’t change as quickly as our mercurial overreactions to them.

It may be useful to imagine the market as a fine race car with an exquisitely sensitive steering wheel making it impossible to drive in a straight line. Tiny bumps in our path cause us to swerve wildly, and we zig-zag from fear to greed and back again, from unreasonable gloom to irrational exuberance and back.

The Point?

We’re capricious and easily bored and, whatever the domain, seem to prefer a lot of variety. Intentionally or not, we impose it even when it’s not there.

Our objective criteria may be bone structure, symmetry, and skin texture for beauty; graduation rates, SAT scores, and faculty publications for universities; P/E ratios, capitalization, and cash flow for businesses. Yet we can’t ignore popular psychology and the complicated, fluctuating, poorly understood way it helps produce a Julia Roberts, a Yale, or an Amazon.com.

Professor of mathematics at Temple University, John Allen Paulos is the author of several books, including A Mathematician Reads the Newspaper and, most recently, I Think, Therefore I Laugh. His “Who’s Counting?” column on ABCNEWS.com appears on the first day of every month.

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