How to Manage Investment Information Overload
The internet is an amazing resource; but it has enabled an information-based society that is often plagued with excess.
In financial markets, we often experience that excess as information overload and a low informational signal-to-noise ratio.
What is “information overload”? First popularized in Alvin Toffler’s book Future Shock, it refers to the detrimental effect on understanding and decision-making that too much information can have on us. It’s a form of sensory overload which can lead to disorientation. Toffler suggested that predictive accuracy falls off when individuals are confronted with rapidly and irregularly changing inputs and situations. In tests, decision-making is adversely affected due to our inability to make proper assessments due to the pace and volume of inputs. It’s pretty obvious that if too much information can be toxic, then we, as individual investors, should seriously review how we consume and utilize information.
The internet provides a treasure trove of data that requires filtration and processing into information, which in turn needs to be cultivated into knowledge, which can lead to understanding and ultimately wisdom. For investors and traders, achieving that high level of understanding, and perhaps even wisdom, is a distinct challenge today due to the large quantity and unknown quality of the available data.
Psychological tests indicate that it is not just the overall quantity of information that is overwhelming. The frequency of data available in financial markets has an added toxicity due to a behavioral effect termed “loss aversion”. Humans experience a loss with a negative effect on us that is as much as 2.5 times the positive effect of a gain. Neuroscientists have theorized that the connections in our brains from the emotional to the cognitive are stronger than the reverse. So this multiplication effect can be dramatically detrimental to your confidence if you monitor your holdings too often.
Even if you have a high probability of success – say over 90% – on a yearly basis, on shorter monitoring intervals the probability of experiencing a success diminishes, to just over 50% for a given minute. So that means, statistically, you are going to experience more disappointment if you monitor your holdings more often – and with a 2.5 loss pain to pleasure ratio, you are asking for a whole lot more pain when you monitor your holdings excessively. In financial markets, the hard-core exerciser’s mantra “No pain, no gain” does not apply!
Another issue with the internet relates to quality of information. With so much information from so many disparate sources, it becomes more difficult to establish trust and reputation, so disinformation (The dissemination of intentionally false information to deliberately confuse or mislead) is also a danger. Get rich quick schemes that announce “I made $6,457,000 in one year trading the XYZ method!” come to mind.