Infobesity – and what to do about it?

11 Dec 2014

By Shadforth Financial Group

Traditionally the major challenge, when it came to making decisions, was the lack of reliable information. This was true in most areas of life – and it was definitely true when it came to personal finance and investing. However, our world has come a long way in the last 20-years or so. Now our challenge is definitely in the other direction with too much information often being the real challenge. In fact, a new term has emerged to describe this condition – Infobesity.

Amongst a host of technological changes, the internet now enables each of us to access far more information than we could ever hope to read, hear or watch in a lifetime let alone on a quiet Saturday afternoon or Tuesday evening.

To illustrate the sheer volumes, consider the following:

  • There are estimated to be more than 510 million active webpages on the Internet.
  • More than 48 billion web pages are indexed by Google (and are therefore readily accessible from the average user's web browser).
  • Between 60 and 100 hours of video is uploaded to YouTube every minute! You may be surprised to know that a significant percentage of this content is accurate, informative and genuinely useful.
  • The first email was sent in 1971 with billions now being sent and received each day. The average office worker spends 28% of their time reading their 105 emails per day.

Clearly there is an overwhelming volume of content. Although much of it is clearly 'junk' even if you could find the 'good' content that you were actually interested in you couldn't possibly hope to consume or digest more than a tiny fraction of it. If you tried, it would be like drinking from a fire hose – not very pleasant and not very effective.

When this volume of information is combined with some of our basic human responses the impacts can be significant and the best way to guard against these impacts is to understand the risks.

When it comes to personal finances and investing, most of us have a desire to stay informed, to keep up-to-date, to have an understanding of what is going on in markets and in economies.

If we consume market and economic commentary of a reasonably high-quality and which doesn't offer certainty in an uncertain world than this can be a very useful course of action, helping us to understand market conditions and returns. However, when so much of the available content is actively competing for our attention, it is all too easy for dispassionate commentary to drift into crystal-ball gazing and fortune telling.

Unfortunately there is a very strong human tendency to give credence to the most recent information we have heard. This is called recency bias. When recency bias is combined with another strong human tendency – action bias – the results can be disastrous.

Action bias is the tendency, in many circumstances, that taking action feels safer to us than not taking action. The classic case of action bias in investing is selling shares just after the market has fallen 10%. Most of us know that selling low and buying high is a recipe for a sub-par investment experience, yet every time the market experiences a correction a large number of investors rush for the door and sell their investments and lock in their losses. Of course, history has shown again and again, that market corrections are much more likely to provide an opportunity to profit, by buying, than an opportunity to protect oneself from future losses by selling.

Likewise, when we read opinions, particularly well articulated opinions that argue with passion that we must buy this or sell that there can be a very strong tendency to take action based on these views. After all, "what if he's right and there is a bubble about to burst?" There are more investment opinions, forecasts, prognostications and the like available to each of us today than at any time in history. Of course many of them disagree on what is coming and what the latest data from the US actually means.

Whilst some of the opinions being offered are clearly in the highly questionable category, many are intelligent, based on detailed research and delivered with highly compelling professionalism.

The problem is that for every set of facts, there are multiple, mutually exclusive conclusions being offered by equally qualified commentators. So what are we to do?

Consider this three step plan for dealing with Infobesity (regarding personal finances or any other subject)...

  1. Have a plan – the most effective inoculation you can have against being swayed to action is having a clear plan in place and underway.
  2. Develop a small number of trusted sources – limit the number of voices you are listening to and remember that none of them can predict the future.
  3. Limit your decisions – although you should regularly review your plan and always be open to adjusting it as new information comes to hand, it is vital to remember that changing course has costs and second guessing with the benefit of hindsight is rarely profitable.

By following the above three steps you should find that you can effectively eliminate much of today's information excess and the accompanying temptation to react to the latest news and instead remain focused on the plan you have in place to reach your end goal – whatever that may be.

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