Investors, Beware the Pitfalls of Too Much Information

If you're thirsty for financial news, you have plenty of gushing media fonts from which to drink. Consider the most popular fire hose of financial info: CNBC. Switch on the channel and at any given moment you may see four wonks expounding, three tickers streaming, two hosts a-hosting and exchange rates for the Indian rupee. And the hundreds of sources spewing financial factoids on the Internet can be equally overwhelming. Does this information help us make better investment choices, or does it just fool us into thinking we can?

It appears that the wiring in our brains enjoys the stimulation but processes it poorly. Even though you may think you're absorbing it all, there's no way you can take in everything at once, says Daniel Simons, a cognitive psychologist and coauthor, with Christopher Chabris, of The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us (Crown, $27). "Attention is inherently selective—we can only take in a thin slice," says Simons. Absorbing so much information is difficult, and often it can't be processed properly. Chabris says the mind has a tendency to equate information, such as facts, with knowledge (expertise), which gives you "a tremendous illusion of knowledge."

And this faux knowledge becomes dangerous if used as a basis for trading securities. For example, in one experiment conducted by behavioral economist Richard Thaler and some of his colleagues, the subjects managed an imaginary college endowment consisting of two mutual funds. They could choose how often they received information about fund performance and how often they could trade. The experiment simulated 25 years of investing.

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The results revealed an information paradox: Less can be more. Participants who received information once every five years, and could trade only that often, earned returns that were more than twice those of participants who were updated monthly and could trade that frequently.

One of the endowment's funds simulated a bond fund, and the other mimicked a stock fund. Given that a stock fund is more volatile, its frequent dips often caused participants to panic and bolt to the less volatile but lower-performing bond fund. Those who received five-year updates were spared the pain of short-term dips. They received long-term return data, which was much less volatile, so they were more likely to stick with the higher-performing stock fund.

Treasure hunt

Here's another twist information hogs should consider: We tend to put too much stock in information we "discover." This tendency has been shown in experiments with medical personnel who were given either complete data on a patient's case or partial data on the same case, with the option to uncover more. After the additional facts became known, everyone had the same info. But those who had done research were more influenced by it when making a diagnosis.

Chabris admits that he fell victim to the same tendency. He became interested in biotech companies that were developing drugs for mental disorders, and he began searching for investing clues in obscure journals. "It was like a treasure hunt," says Chabris. "But if someone had handed me the same information, I wouldn't have been nearly as excited." Only when researching his book, he says, did he realize that he'd fallen for the bias.

So what's the cure for information overload? Money manager Bo Billeaud of Lafayette, La., says he made a New Year's resolution to turn off financial-news networks and focus his investing energy on studying long-term trends. Billeaud thinks back to when we had "no Internet, no CNBC, no day traders and no minute-by-minute updates announcing the arcane and meaningless." And, he says, "Guess what? No problem."

Kiplinger's is partnering with Nightly Business Report on the "Your Mind & Your Money" series, funding for which is provided by the FINRA Investor Education Foundation. For companion video reports, tune in to NBR on your local PBS channel July 12 and 26.