The financial system as a communication channel

On page 25, Terranova discusses the Dow Jones Industrial Average as a communication channel. At this point in her book she has been discussing "The Limits of Possibility," or the ways in which the probabilistic nature of information theory both relies on and leads directly to a constrained field of possibility. "How many points did the Dow Jones lose today and what are the chances that it will go up?" she asks. "Is it by chance that there is a whole sector of the financial markets, such as that of futures, that is based on a kind of legal gamble on the probable future?" (25) She cites Weaver's point that "the action of a code on a situation was also a kind of containment of the openness of the situation to a set of mutually excluding alternatives" (24). Her view of the situation reveals the reverse operation of the model feeding back to the modeled. As she says on page 18, "The tactics.. [begotten by a naive understanding of information theory] might backfire because it does not take sufficiently into account the powers of feedback or retro-action."

In the case of the financial markets, a naive view of the Dow as a communication channel over the set of messages {rise, fall} would not take into sufficient account that actions taken as a result of 'receiving' (really interpreting) messages from the numerical pattern of the price will feed back as 'noise' to the information channel. In fact, investors and economists alike model financial markets as nonlinear chaotic systems. Regardless of this somewhat sophisticated view, market movements are always projected onto a one-dimensional space of share price, the nature of which necessarily constructs {rise, fall}. This unidimensional projection of the multidimensional market, Terranova implies, becomes the space of a communication channel, subject to the same types of distortions and constructions present in one. Investors, interested only in profits and losses, take the multidimensional space of, say, the prices of each stock in the Dow, and reduce it through projection to one average movement. That radically degraded version of the system is then fed back into the system, largely through consumer action (the Dow has been a focus for this country for a while). And this feedback can create patterns.

The unregulated backwaters of the market, dependant on "poorly understood derivative securities" and derivatives of derivatives of bundles of those derivatives, had become an involuted communication channel whose success (rise) barely depended on the source of its value but rather on the feedback dynamics of the market itself. As soon as the source was shown to be worthless, those dynamics pulled the whole sector under. As Terranova says, the interpretation of a signal or system as a communication channel necessarily constructs a disconnected realm of possibility around it which is divorced somehow from its real substance. When that interpretation is fed back into the signal, the whole system starts to lose its anchor and float away.