ENOUGH – How much is too much?

ENOUGH – How much is too much?

by Erin McMenemon on January 22, 2019 The Behavioral Investor

When can more be less? Some things have a clear line—cream in your coffee, martinis on a night out, sunshine when you are sitting on the beach.

But what about information? In our volatile emotional world, information is fast, flowing, and hard to decipher what is based on facts or fear. Just as more and more people are “googling” their symptoms and coming into the doctor’s office with more “facts”, investors are soaking in the daily headlines and reading more in the news and on social media about what is happening in the financial markets.

I would like to argue that from a behavioral decision-making perspective, this can have some negative consequences. Will more information lead to better decisions or can it lead to a common behavior bias of overconfidence and obsession?

It is often stated that you can find statistics to back up any claim (hindsight is 20/20 remember). You can find someone with an opinion on both sides of every story. You can find a conspiracy theory if you are looking for one, and a “study” and research paper on everything. When you are thinking about your investments—does all the information out there matter? I would argue that financial markets are driven by a handful of things, and additional information may just be noise with no validity on top of that (to see what we think is important drivers for investments read here).

It is often stated that you can find statistics to back up any claim (hindsight is 20/20 remember). You can find someone with an opinion on both sides of every story. You can find a conspiracy theory if you are looking for one, and a “study” and research paper on everything. When you are thinking about your investments—does all the information out there matter? I would argue that financial markets are driven by a handful of things, and additional information may just be noise with no validity on top of that (to see what we think is important drivers for investments read here).

Investors can drive themselves crazy trying to figure out what the best course of action may be. This can lead to exhaustive and obsessive research on the internet, talking to people, and watching the news. It is HARD to focus on relevant, factual information.

Investors can become dangerously “overconfident” after having read and researched so much information (I have done this before going into the doctors office for sure). The information could all be saying the same things (repetitive) or based on statements with no predictive power (false correlation). The more you see or hear something, you start to think its 1. True and 2. You are ready to make decisions based on the information.

Its all TOO MUCH. In this case, you would have been better off with less. Less is more.

When have you done ENOUGH to feel confident? How can you balance the buckets of information with what you need to sleep well at night?

I would suggest these things:

  1. Reducing the number of sources you rely on for truthful information
  2. Rely on people who have your best interest in mind and let them do the heavy lifting (we have to say “enough is a enough” too)
  3. Stick to your conviction and keep your overconfidence in check