Is this a case of PWM interference?

Question

I have a Electronic Speed Controller (ESC) being controlled with Pulse Width Modulation (PWM) from an Arduino.

When I put my hand close to the cables the signal goes screwy until I move my hands away. I checked for shorts but didn't find any. I don't have an oscilloscope or that would give me my answer.

What's happening here?

I also made this video to help explain the situation.

Rough Schematic

EDIT

Adding working Arduino code for future visitors

#include <SoftwareServo.h> // Download from http://playground.arduino.cc/ComponentLib/Servo

SoftwareServo myservo;  // create servo object to control a servo

//int potpin = 0;  // analog pin used to connect the potentiometer
int PIN = 2;
int val;    // variable to read the value from the analog pin

void setup()
{
  Serial.begin(115200);
  myservo.attach(PIN);  // attaches the servo on pin 2 to the servo object
}

void loop()
{
  char r = Serial.read();
  String inStr = String(r);
  if(r > -1) {
    Serial.print("serial in: ");
    Serial.println(inStr);
  }

  if(r <= -1) {
    // void
  } else if(inStr == "h") { // high
    Serial.println("HIGH");
    digitalWrite(PIN, HIGH);
  } else if(inStr == "m") { // medium
    Serial.println("medium");
    myservo.write(90);
  } else if (inStr == "l") { // low
    Serial.println("LOW");
    digitalWrite(PIN, LOW);
  } else if (inStr.toInt() >= 0 && inStr.toInt() <= 9) {
    int val = inStr.toInt() * 20;
    Serial.println(val);
    myservo.write(val);
  }
  
//  float t = millis() / 100;
//  val = sin(t / 10) * 1000;//analogRead(potpin);            // reads the value of the potentiometer (value between 0 and 1023)
//  //  if(val < 0) val *= -1;
//  val = map(val, 0, 1023, 0, 179);     // scale it to use it with the servo (value between 0 and 180)
//  val = millis() / 100;
//  myservo.write(val);                  // sets the servo position according to the scaled value
//  Serial.println(val);
//  delay(15);                           // waits for the servo to get there

  SoftwareServo::refresh();
}

Answer 1

This answer originated from a comment by @Mark

This is a ground issue.

Even though the ESC will work without a ground from the Arduino, to make the signal stable I needed to accompany the signal wire from the Arduino with a ground wire from the Arduino.

Per my example I took the disconnected ground from the ESC and connected it to the GND from the Arduino.