Hat-tip to Bret Swanson, who recently linked to three thought-provoking book reviews of the new book by James Gleick entitled "The Information: A History, A Theory, A Flood."
The three articles -- by Nicholas Carr, John Horgan, and Freeman Dyson -- hint at the deep issues explored by Gleick concerning information and meaning, centered around the seminal life and work of Claude Shannon, founding father of information theory, and inventer of the concept of the "bit" (or "binary digit" -- the theoretical smallest unit of information, encoded as a choice between two opposites, such as "yes" vs. "no," or "up" vs. "down," or "0" vs. "1").
Shannon noted the distinction between signal and noise -- information is best transmitted by disrupting a regular background, such as a blank sheet of paper rather than a page full of other scribbles, or a regular sine wave within the electromagnetic spectrum in which the disruptions to the regular pattern or the wave constitute information.
He also authored the radical proposition, as Dyson's article discusses, that "meaning is irrelevant" -- that information can be transmitted, stored and manipulated more efficiently when divorced from meaning, turned into a mathematical formula.
This concept has ushered in the incredible flood of information -- an "Information Age" -- an "Exaflood" as Bret Swanson calls it, with reference to the sheer volume of information being shared, a reference to "exabytes," each of them equal to 50,000 "Libraries of Congress" of information or about a trillion 400-page books (each byte is equal to eight bits, and an "exabyte" is equal to one times ten to the eighteenth bytes). As the book reviews above indicate, it has also led to new ways of understanding the universe itself, as an expression of coded information (think, for instance, of DNA).
The epistemological questions raised by this topic are endless, but for investors there are some clear and important areas to consider. We have already written extensively about the important investment opportunities related to the new ability to transmit more information more rapidly and cheaply than ever before, in our series of posts on the concept of "the unstoppable wave" (see here and here).
A different angle on this same issue for investors to consider carefully is the distinction between information and meaning. At the end of Nicholas Carr's review of The Information is the warning that: "The danger in taking a mathematical view of information, with its stress on maximizing the speed of communication, is that it encourages us to value efficiency over expressiveness, quantity over quality." This subject is extremely pertinent to the management of investment portfolios, where the sorting through of massive amounts of information is a daily necessity, and the ability to find the meaning in the information is critical.
We have written before about those who wish to reduce investing to mathematical formulas or capture "risk" in a series of graphs and reduce it away with esoteric vehicles of structured finance (see here, here and here). It strikes us that those who fall for this error have fallen into what Carr calls "the danger in taking a mathematical view of information."
Nicholas Carr warns in his final sentence that what can be lost in such a reduction is "the stuff of poetry." It might not seem like "poetry" has much to do with portfolio investing, unless you understand that poetry is actually about seeing connections, and that great poets can see and articulate connections that nobody has seen before.
The challenge in negotiating the flood of information that we are faced with in the modern world and in investing today is to find the right connections between the bits. We would argue that this requires more than a computer model can deliver. This is not to say that the incredible growth of information available is a bad thing -- far from it. However, it is certainly true that this exponential increase creates challenges, and that it makes the ability to analyze critically and see connections all the more necessary for the modern investor.
We are looking forward to reading Mr. Gleick's book, and believe that all investors should think carefully about its implications.
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