The metric system & investor value biases (lets start talking basis points)
Most people think "the market" is the Dow Jones and hear talking heads tell ever greater tales of markets, swooning, plummeting, soaring etc. connected to some number. The market collapsed 10 points or jumped 50 points etc. The TV character then attributes this activity to some random event and thus a fictive narrative is born. These stories and storms in teacups then sell Escalades, soap and insurance etc.
The average person has no idea what Dow point movements mean. Even experts who watch the market day to day use them as relative metrics. Familiarity gives Dow points relative meaning. For example, if the Dow Jones Industrial Average moves 50-60 points typically then a 100 or 300 point move is understood to be a big thing.
What counts is percentage of change
The DJIA maintains its dominance as a market barometer due to human cognitive failure. The DJIA as a market barometer is horrible in both scope and construction comprising only 30 shares weighted in an abstract manner.
We get psychologically anchored to thinking about values in a relative way and thus become trapped within a mental framework. Our perceptions get skewed. Think about people who bought homes based on comparables across the street, the mental framework made sense from a relative value perspective, but was useless in terms of absolute value.
My suggestion for financial journalists would be to talk about index Basis Point moves. So a 2% move in the dowjones would be 200 basis points.
This is the perfect time to do it with the dow near 10,000 the relative Point value of the Dow and Basis point value of the dow are about the same. Basis points allow people to talk about something meaningful (i.e. relative percentage moves).
People are anchored to the relative nature of Dow points, this is why the S&P 500 or other indexes will never usurp the Dow's position for average people discussing the US equity markets. There is an anchored value perception. For all of you value investors out there, Dow Jones has a great moat with this.
This suggestion to discuss equity indeces in basis points of has about as much chance of succeeding as America's "war on english units" move to the metric system in the 1970's. People are still blaming Jimmy Carter for that one.
There are 3 countries in the world who haven't adopted the metric system, Burma, Liberia and the US
Once people gets used to a relative unit of value their mind gets anchored there. The smart investor can use this to their advantage as the ast majority of people are too lazy to shift a relative frame of value to an absolute one. This advantage become ever greater as values move to extremes.
One of the funnier quotes about value shifting came from the humorist author P.J. O'Rourke who wrote," Drugs have taught an entire generation of Americans the metric system", sad but probably true. Don't expect the US equity market to be discussed in basis points anytime soon, expect it to keep swooning, leaping and generally carousing around in Dow points, and that folks sells advertising.
