Has More Data Made Investing Easier?

There is infinitely more information available to us today for making decisions than there ever has been in history. If we don’t know whether or not a restaurant would be a good place to eat, we could do a few minutes of research and find an abundance of customer reviews, menu prices, and nutritional content. If we’re thinking about going to see a movie, we can quickly look on the Internet to find commentary from hundreds of critics as well as the average reviews from hundreds of thousands of moviegoers. So, does all of this information that is readily available to us necessarily make us better decision makers?

One of the most interesting findings in contemporary behavioral psychology is the phenomenon that has come to be known as the “paradox of choice.” In one experiment, researchers set up shop inside a mall and offered samples of jams for shoppers to buy. On one day, the researchers offered 30 different jams; on another, they offered only 4. It turns out that people bought more jam when they had fewer options. Why? Because the complexity of having to decide between too many alternatives led them to not make any decision at all. In another experiment, employees in a company were offered the choice between different 401k plans. Again, the employees who could choose between dozens of possible plans ended up not even signing up whereas the employees who were only given a few options signed up more frequently.

Now, what does all of this have to do with investing? You may have already guessed it. Just like in every other aspect of life, we have more information available to us for making investing decisions than we ever have before. Just pop the word “stocks” into any search engine and you will get back a hundred million results within a fraction of a second. On the surface, we may think this will lead to better decisions. We know almost immediately about fluctuations in stock prices and economic events that could affect our portfolio. Isn’t more information a good thing? How can more information possibly be a handicap?

Well, just like everyone else, investors also face the “paradox of choice.” When a decision becomes too complex with too many variables, too much information, and too many alternatives to choose from, it leads to decision paralysis. We may not end up making any decisions, or we may even end up making bad decisions because we get too frustrated trying to figure everything out.

A good rule of investing is to apply filters to the news that you follow. Only allow yourself to review your portfolio at certain intervals, and only follow a small number of trusted sources for your information. In other words, remember to keep it simple sally (KISS). There is more information available than you need and, if you allow yourself to take in too much of it, it will only lead to confusion. If you are struggling with how to manage all the information and cut through the clutter to find what matters, feel free to reach out to us for your complementary consultation. We want to help you focus on what’s important, so that you can get the results that you need.