Investors Suffer Due to Information Overload
There’s an enormous problem facing the world.
And it’s only getting worse.
I hear from investors who subscribe to dozens of financial publications.
I’ve listened, horrified, as they lament their inability to keep up. They have more than 500 open positions in their portfolios.
Remember, these are individuals… not hedge funds.
They’re supposed to be retired. (Their spouses are quick to point out “supposed to be.”) And yet their “golden years” are being stolen, minute by minute, stock tick by stock tick. Their days are spent reading alerts and articles, and trying to make sense of contradictory views.
This isn’t what life is supposed to be about.
And it’s debatable whether all of that information will make you a “better” or “more informed” investor.
In fact, the opposite is probably true.
Back in the 1990s, when I was still looking at newspapers for stock quotes, the headlines were about the “information superhighway.”
Obviously, it’s a laughably outdated term today. Now it’s used mockingly to describe a quaint view of the future.
We were enthralled back then with the idea that this new high-speed path for data and communication was going to change the world. It was going to disrupt everything.
Our dial-up modems were clocking in at “blistering” speeds of 28 kilobytes per second.
Today, my smartphone runs at 60 megabits per second (Mbps). For perspective, those dial-up modems in the 1990s were running at 0.028 Mbps.
We’re accessing information at ever-increasing speeds.
At the same time, we have ever-increasing sources for that information.
Back in 1970, futurist Alvin Toffler popularized the concept of “information overload” in his book Future Shock. That was written before the internet… before dial-up modems… before the pace at which data is being spewed at us today.
In fact, last year, we created more data than in the previous 5,000 years.
We live in a world being flooded by data.
Neuroscientists like Dr. Daniel Levitin have pointed out that our brains haven’t yet evolved to deal with the modern world. At least not with the deluge of information we’re bombarded with every second of every day.
It’s hard enough to process it all, let alone try to make sense of it.
We suffer from analysis paralysis. And we find ourselves suffocating from “data smog.”
As journalist and author David Shenk wrote in 1997, “Information, once rare and cherished like caviar, is now plentiful and taken for granted like potatoes.”
And in turn, it becomes harder to separate fact from fiction.
Flash forward to today, and we’re wrestling with “post-truth” and the proliferation of “fake news.”
So more doesn’t always mean better. And studies have shown too much information leads to bad decisions.
A study of bank loan officers found that when they were overloaded with information, they took longer to make decisions and were less accurate in predicting bankruptcies.
Other studies have shown that investors suffer in their asset allocations because of information overload.
They don’t know what to do. So they do nothing…
Or simply choose default settings that aren’t right for them.
In October 2013, the SEC weighed in on investor information overload. Chairwoman Mary Jo White argued that too much information was provided in company filings. This was making it difficult for investors to find data relevant to their needs.
The response from many investors wasn’t what most expected. They demanded even more information.
When making complex decisions, we often feel the need for more information so that we can be better informed and can make better decisions. It’s a fascinating situation.
But the fact of the matter is that having too much information is just as dangerous as having too little.
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