Third-Order Information Produces Modern Superstitions

An unfortunate effect of living in the information age is that we have become victims of third-order information that should have little or no impact on our actions but does simply because of its persistence and pervasiveness.

A good example is the speculation dumped daily on our heads about the possible impact of a Greek debt default on our own economy. This is what I would call third-order information — speculation about a possibility of an event unlikely to have much real impact on our lives even if it comes to pass. Yet the daily flooding of our consciousness with this third-order information is scaring some of us to change our behavior. If we begin to worry that a Greek debt default may cost us our livelihoods, we may not buy a needed shirt or try that new restaurant or take that weekend trip — effectively letting third-order information have a first-order impact on our lives and producing a second-order impact on the lives of those who depend on our normal consumption to feed their businesses.

Analogizing this phenomenon to the personal sphere illustrates the unhealthiness of this kind of reality inversion. Suppose you happen to hear that a neighbor is considering buying a gun. Without any knowledge as to what that neighbor intends to do with a gun or even if he really will go through with the purchase, you begin speculating that the gun might be used against you because of some unpleasant exchange in the past. Suppose that based on this speculation you buy a gun to protect yourself. It would take very little time for others in the neighborhood to fall victim to the same type of third-order information, leading to a proliferation of guns in the neighborhood — to the general loss of peace of mind, deterioration in the quality of life in the neighborhood and, eventually, a proliferation of for-sale signs that would cause a drop in home prices. A third-order reality — i.e. neurotic speculation about a possibility — would have produced a first-order impact on the lives of everyone in that neighborhood.

The rise of third-order information as a source of influence on our collective behavior is fueled by the rise of people seeking to profit by acting on speculation. Hedge-fund managers, day traders, financial analysts, financial media and others have built up a global industry that attributes far-reaching significance to remote possibilities. On a daily basis the world produces a surprising dearth of first- and second-order information — i.e. information that will either certainly have an immediate impact on our lives or can reasonably be expected to have an impact in the near future. The void is filled by continually trumpeting and rehashing third-order information.

Common sense and a modicum of quantitative reasoning would suggest that even a default by the Greek government would have a trivial impact on our first-order reality. Greece is a smallish nation of 12 million people in a world of 6.5 billion. Its entire public debt is about $350 billion in a world with about $1,000 trillion in assets — or about a thirtieth of one percent. Our own banks have loaned only a few billion dollars to Greece — less than a hundredth of 1 percent of their assets. Any default would only slightly weaken the profitability of a few of our banks, resulting in a negligible loss of dividends and share value. It’s hardly an event that should, in logic, disrupt our economic activity or sense of financial well-being.

Our fixation on third-order information has taken on aspects of a collective superstition — fearful behavior in response to highly unlikely occurrences. The global third-order information complex has succeeded in roiling the world’s stock markets by churning out a wild domino scenario in which a Greek default triggers the collapse of the entire European Union, followed by the U.S. and the global economy, heralding another great recession or even a second great depression. And of course, the planting of this scenario into our collective consciousness has actually put us in some actual danger of precisely such a collapse caused by our own panicked reaction to the remote possibility of what would be a trivial third-order event even if a Greek government bond default does come to pass.

In other words, the jitters about a possible Greek default has already had a more catastrophic impact on the world in the form of trillions of dollars of lost economic growth than the actual Greek default could ever have produced. The rise of our morbid fixation on third-order information is, therefore, a new risk that is looming ever larger in our age of instant access to information, whether first-, second- or third-order.

To keep third-order information from threatening our first-order reality we must keep reminding ourselves that fixating on speculative possibilities is as neurotic as acting on rumors and as ignorant as letting superstitions dictate our actions.