Hi Guys,
Can too much information detract from our investment performance? Are we prone to information overload?
Indeed, the answer is “yes”.
But not in the way that you might suspect. More information does enhance our ability to make a more rewarding financial decision. But a subtle feedback loop functions in a negative manner to counteract that positive contribution. The increase in knowledge that is lashed to the added information also potentially increases our confidence level to an extent that a state of overconfidence is produced. That overconfidence can lead us to some faulty decision making.
Once again, the Behavioral research scientists have designed tests to demonstrate this propensity. We quickly develop a perception that we have control when in reality we do not. Harvard University professor Ellen Langer categorized this phenomenon as “the illusion of control” . She conducted sets of random outcome experiments that convinced participants they could control results that were clearly outside their ability to influence. Playing card and coin toss games were rigged in a simple way that persuaded the subject players that they could falsely control outcomes.
Here is a Link to an extended Boston Globe article that summarizes some of Langer’s accomplishments and some of her more recent study efforts in a popular, non-technical format:
http://www.boston.com/bostonglobe/ideas/articles/2010/02/21/mind_power/Some of her studies are fascinating; some of her findings were totally unexpected. Above all else, Langer believes that purposeful mind power absolutely rules. At times we are not as mindful, as logic driven, as we think we are. Over her long career, Ellen Langer has accumulated her share of detractors. These critics claim her work has devolved into a sort of pseudo-science, selling, and showmanship charade.
Purportedly, Ellen Langer's book “Counterclockwise: Mindful Health and the Power of Possibility” is scheduled to be made into a motion picture. It will star Jennifer Aniston as Langer. Not too shabby for a dull Behavioral researcher (Langer is surely not in that category).
With respect to Langer’s card and coin flipping experiments, subject participants were easily self-persuaded that they could command the situation. That false control authority was further exaggerated when the participant’s opponent (a shill for the test conductor) was depicted as an inferior adversary (like being poorly dressed, dense, or greatly overweight).
Apparently, almost everyone in most circumstances believes they are “above average”. That assumption can generate disastrous outcomes. As Clint Eastwood said in his Magnum Force movie: “A man’s got to know his limitations.”
Of course, statistically speaking, for all of us to be above average is obviously wrong by definition alone. But we all tend to overestimate our skill set given numerous challenges or competitive scenarios.
To illustrate, the professional golfer typically postulates he makes 75 % of 6-foot putts; the reality is that he succeeds about 55 % of the time. Financial consultants like to believe they are on-target with 67 % accuracy; the reality is that they struggle to clear the 50 % coin-toss hurdle. Researchers at Caltech discovered, after reviewing scores of predictions from a wide spectrum of disciplines, that the highly trained expert is no more accurate a forecaster then the reasonably informed amateur.
With respect to financial and investment matters this finding tells us what the true value of professional soothsayers is worth – next to nothing. Even the Oracle of Omaha, Warren Buffett, is not immune to damaging errors. Buffett enjoys a special place in the pantheon of investment geniuses. He is not only admired for his demonstrated skill over 40-plus years, but also for his honesty and integrity when reporting his few costly failures. No money manager has an unflawed record; not even the remarkable Warren and his partner Charlie Munger.
Buffett freely admits and documents his wrong decisions such as when he bought Maine’s Dexter Shoe Company for 433 million dollars using Berkshire-Hathaway stock in 1988. The Oracle admits that it was his biggest mistake since he completed the deal with over 25 thousand shares of stock in a compromised enterprise that he wrongly judged. By using his firm’s stock for the buy, he ultimately cost his shareholders north of 3.5 billion dollars for the ill-fated adventure. That’s like a gambler doubling-down on a losing hand. Of course you and I have never done this (a cascade of sarcasm here).
Regardless of his very rare failures, Warren Buffett is acknowledged as a world-class money manager and investor. Chess grand masters have similarly established themselves as superior deep thinkers.
How is this accomplished? It’s not IQ. It’s the product of diligent practice. Malcolm Gladwell in his book titled “Outliers” reports that researchers have documented that about 10,000 hours of highly focused and disciplined practical experience is needed to reach this elevated status in most skill-dominated professions.
Here is one Link to the 10,000-hour rule when cast into a salesmen’s perspective:
http://www.victorantonio.com/malcolm_gladwell_10000_hour_ruleThe arduous task of daily practice is a necessary, but not sufficient, condition to realize true elite proficiency. The practice must be carefully directed to enhance topic memory and pattern recognition. Perhaps the Technical Analysis wing of the investment cohort do see things that the less practiced do not. I have tried and failed to cross the perceived insightful thresholds that the technical chart wizards proclaim. That’s either my personal shortcoming or perhaps it’s an illusion on their part.
Recognizing and developing exceptional talent in a number of competitive arenas has been studied extensively by Professor K. Anders Ericsson of Florida State University. It is an intriguing topic. If you are keen to learn a little more about it, here is a reference to an informative summary paper that the Professor and a few coauthors prepared:
https://my.psychologytoday.com/files/u81/Ericsson__Roring__and_Nandagopal__2007_.pdfThis 2007 Ericsson review paper is a bit long (54 pages) and sometimes intense, but it gives some stimulating illustrations and offers insightful advice on how these experts achieved their superstar status. It is not so much innate talent or giftedness, but is largely due to deliberate and painstaking practice – and then more practice again.
So the good news is that hope springs eternal for all of us, however it demands a substantial time commitment. The bad news is that the Ericsson’s assembled data sets show that performance climbs initially, reaches a maximum at mid-age, and slowly erodes at an advanced age. Ericsson quotes a 10-year time horizon to develop and season any required skill set; the experience factor establishes a pattern recognition background. At this juncture, I’m personally well beyond the generic peak performance period.
Ericsson observed that “In summary, investigations from the expert performance approach have demonstrated that engagement in deliberate practice enables not only the acquisition of complex movements, but also improves the speed at which these moves are executed.” This allows the superstar to recognize patterns and to react quickly. The elite in any skilled field are more made than born.
Like our parents always said “practice makes perfect”; well almost perfect. Keep in mind that all practice is not equal. Ericsson defined the need for highly directed, deliberate practice with rapid corrective feedback opportunities.
Well, I have been doing the portfolio investment thing since the mid-1950s. I certainly have put in over 10 years and likely over 10,000 hours of dedicated study and practice. Unfortunately, I still await the bolt of lightening that will transport me into the realm of the investment elite. I’m suspicious it may never happen. Poor, poor me (this sounds like it has hit music potential).
Earlier, I reported on Ellen Langer’s “illusion of control” hypothesis. The other side of that assertion is the concept of “self-control”. Both sides do exist. In his inclusive book “Thinking, Fast and Slow”, Daniel Kahneman presents some evidence that supports the self-control argument and its benefits.
Psychology professor Walter Mitchel gave 4-year old children the choice of one Oreo cookie immediately or a reward of two cookies if they delayed satisfaction for 15 minutes. Some struggled and ate the cookie in short order; others persevered to receive their prize later. They sacrificed immediate satisfaction for future benefits; they saved. Results were recorded. But the real test wasn’t completed for another two decades. This set-up experiment merely divided the test subjects into two groups: the savers and the non-savers.
The test participants were revisited after this long delay. Their current life status was assessed using several measures of success (education, wealth, happiness). The group that had successfully resisted temptation and persisted with self-control achieved higher marks then did the cohort who had surrendered to instant gratification.
Self-control to abstain from immediate satisfaction pays off throughout life, especially when it enters the investment world. Saving for the future is essential to achieve a comfortable and happy retirement. Patience and persistence delivers the cargo.
I'm doing okay. How are you doing?
Your comments are encouraged and greatly appreciated.
Best Regards.
Comments
Personally, I continue to think that technology (and I've said this on your threads before) plays a large role in investment decisions in that it is vastly easier to make quick buy/sell decisions than it was two or three decades ago. If something goes wrong, a couple of decades ago you'd have to call your broker, there would be a huge commission and there may be a time in that process where you stop, take a minute and decide to take a long-term view. If something goes South now, it's extremely easy to not take a long-term view and dump something in a button click. The immense amount of information offered in regards to research can be viewed both positively and negatively, but I continue to think that the ease of making decisions quickly is a major factor in faulty decision making. It's very easy to dump something and "feel better" than being disciplined. It's also very easy for the average investor to get caught up in something and buy before doing more research, etc.
Hi Scott,
I completely agree. The easy and relatively cheap access to worldwide investment opportunities is a double-edged sword.
On the positive side, it permits us to fill our portfolio with potentially very diverse and low correlation coefficient holdings.
On the negative side, it encourages hyper trading activity that is based on immediate , short-term emotional reactions rather than on longer-term planning. It tilts the classic struggle between reflexive and reflective considerations more towards the gut reaction response. Many academic studies conclude that a dumped holding often outperforms its replacement; historical data suggests this is harmful to end wealth.
As in most instances, a more balanced approach will likely deliver more rewarding performance.
Thanks for your contribution.
Best Wishes.
A small piece snipped from your write: "Above all else, Langer believes that purposeful mind power absolutely rules. At times we are not as mindful, as logic driven, as we think we are."
>>> Whatever level of my logical side that ever existed has been modified over the years by exposure to real events and the longer I live, the better I am able to classify these mental totalities of exposure to continue to form an intuitive base. This can become the mental condition of still being able to do something wrong or incorrectly, but being aware of the moral or possible negative aspects at the time of the action; versus the young or not intuitive state of a mind doing something wrong or incorrectly, but not yet aware of possible negative consequences at the time of the action.
'Course, some or all of this may be tossed out of the doorway, if one is in a state of high anxiety or a very stressful situation. Ultimately, the sooner one is able to discover who they may be mentally during a variety of circumstances; the sooner will they discover what will become intuition and hopefully make mostly positive reflecting decisions.
Lastly, regardless of one's mental starting point, throughout life will find a variety of physical changes which will also alter the chemistry of the brain; which may never be same as it may have been at any point of one's life.
Me? I am still practicing to hone the intuition; and seeking investment perfection...:):):)
An investor surely better understand who they are when dealing with investment choices for their own monies, be they trades by the minute, hour, day or a longer time frame.
Regards,
Catch
Hi Catch,
Thanks for your thoughtful and personal reply. Your life experiences and personal stories are important inputs that direct how you interpret data, and guides you to informed decision making. It is a maturing process. Thank you for sharing with us.
I suspect the process that you identified is the basis for the 10,000-hour rule that I cited in my original post. We just can’t study a problem like investment portfolio construction in isolation; we learn a lot more by actively addressing that task. Making investment decisions that sometimes fail, and learning from that failure enhances are ability for future decisions.
The academic reporters on this topic often reference the Beetles who developed their superior musical talent after 10,000 hours of learning performances in Germany. Even child protégés move into the elite class with added practice. Many researchers cite Mozart as a gifted child protégé whose later works were far superior to his earlier compositions. Continuous practice enhanced his gifted musical skill set.
Most likely, none of us will ever achieve this top-of-the-pyramid status as investors. However, we are all capable of improving our results with committed study and dedicated application of lessons learned with the flexibility to adjust and adapt as a function of our investing experiences.
Like good wine, we should improve with age. Well I can dream can’t I?
Best Wishes.
"I continue to think that the ease of making decisions quickly is a major factor in faulty decision making."
I completely agree.
Hi Investor,
It’s good to hear from you again; it’s better yet that we agree in this area.
When collecting data in preparation for an investment decision, probably the most difficult task is to decide when we have penetrated the threshold of information overload. That’s likely because no universal rule applies; the resolution of that quagmire is highly situational dependent. When do we decide to pull the trigger?
In those cases I usually default to an Occam’s Razor approach: In short form, the simpler the approach, the more likely it is the correct method. Easily said, but difficult to apply. It is different for each of us, and also varies dependent upon the special scenario being evaluated. One obvious issue is to be “analysis paralyzed.
With respect to information overload, the Behavioral researchers like to quote a study conducted by Paul Slovic from the Oregon Research Institute. The study deals with horserace handicapping. Professional handicappers were challenged to select winners using an almost endless array of statistical data that is conventionally assembled for horse-jockey combinations. They were tasked to make their winner choices restricted to various sets of criteria that they themselves selected. The number of permitted criteria were systematically expanded from 5 to 40 parameters.
The expert handicappers successful score ratio did not improve as the number of parameters was expanded. They exhibited no useful way to exploit the added data sets; they had crossed the horseracing threshold of information overload.
It’s always a pleasure to exchange thoughts on a topic with MFO participants. Many informed interpretations of complex issues have the likelihood of generating a superior approach. That’s why aircraft crew solutions to stressful situations are more likely to have better outcomes than those in a hospital emergency room. In an airplane, a more democratic philosophy is embraced with all members encouraged to make suggestions; in the ER scenario, the senior doctor is king and exercises dictatorial authority. The safety record in the aircraft industry has improved with the adoption of the democratic policy; the error rate in the hospital EM environment has remained flat for decades.
Best Wishes.
Hi Hank,
Amen to your closing statement; I invest in mutual funds precisely to reduce complexity, to reduce my workload, and to hire experts in the field. However, I'm not sure it reduces my anxiety level which is likely low as a starter.
By the way, I score zero on your test questions. I do not know Spain's lending rate, I do not know any natural gas prices, Bernanke is an enigma to me, and I almost never watch CNBC. Somehow my shortcomings using these criteria do not cause me alarm.
Thanks for contributing. We all need more of your active participation.
Best Wishes.
I do watch CNBC briefly in the morning and maybe a bit CNBC World/Bloomberg in the evening for general entertainment. Occasionally, while I am exercising or walking the neighborhood, driving etc/ and have nothing else to listen, I will listen to an CNBC podcast to break the boredom but often the podcast I've on my iPod is several days old so I already know if what they said has turned out to be or not.
I have a bunch of funds that I have invested in so that I do not track this sort of stuff daily. In fact, I even expect my mutual fund managers to take it slow and make good long term decisions. This is one reason I immediately passed over a recent growth fund that Scott has found that has a turnover rate of 350% or something like that. That is not for me. I do not believe people can trade such high frequency and consistently make sound decisions. Given the risk people can be wrong, I try to diversify my asset classes and strategies. This is probably why I do have somewhat larger number of mutual funds and ETFs.
I think that most folks here consider Technical Analysis to be some kind of voodoo, or at the least, junk science. However, I'd like to make a point. I consider that T/A is the antithesis of information overload. As opposed to Fundamental Analysis, which incorporates a myriad of factors, T/A is based only on the price of a security (and to a lesser degree, its share volume, when available). To make investment decisions, one can study charts of a security's price versus selected technical indicators and overlays which are based on price and/or volume, and tune out the noise.
Best regards,
Tony
So, over the years I kind of being skeptical of what is publicly available even if it is sited by many commentators and gurus.
So, I am not sure how this fits with your ER doctor vs Pilot democracy. I do not think either one fits well with interpretation of Financial data and investment decision making.
I will agree. Although my T/A skills need much work and would be no match for yours.
But, the most simple of T/A and monitoring the Fundamental events of late 2007/early 2008 caused us to move the majority of our equity out of the market in June, 2008. I label none of this as pure luck.
Take care,
Catch
Ah, the good old days, eh? When one had to await the WSJ paper at the mailbox, on the next business day.
'Course, we boomers were in the prime earnings years, spending into the consumer side of life and lots of stuff being built in this country, which of course, employed lots of folks. Lots of money fueling the markets and funds. I am sure you recall all of the "dart board" theory doing well back in the day, too. Many of the 80's and 90's years funds did well without much forthought from a fund investor.
However, the internet/business news channels and the ability to learn more and faster; versus a visit to the library to obtain a book, allowed us to be better at protecting our portfolio in 2008.
A mix of the good and a potential for the bad, too.
Take care,
Catch
Absolutely! That is why I stopped managing my own basket of stocks.
I was pretty good at buying good quality businesses...but I got way over my head. What started as fun ( two or three stocks ) ended up with my spare bedroom turned into my own mutual fund headquarters. My wife was not at all pleased with my new found side job. Our once injoyable weekends at the lake quickly turned into my research of possible investments. You just try discussing balance sheets with an angry spouse:(
I find mutual fund investing much more pleasant! While I still have the obsession for invesing - I now leave the managerial aspects with proven professionals. Sure I tinker with my asset allocation, but that is a long way from choosing individual securities
Hi Perpetual_ Bull,
I too started my portfolio assembly using individual stock holdings. That was way back in the 1950s. I continued that exercise until the early 1980s. I’m a slow learner.
I always followed a broad diversification policy, so I typically held between 15 and 30 stock positions during that period. Being very young, I did not invest in bonds during that timeframe. I adhered to both fundamental and technical methods in my decision making process. I constructed my charts using pencil and graph paper by hand. Now that was real work and an unrecoverable time sinkhole.
In addition to my current holdings in that period, I charted several times that number as candidate alternate investments. At times, I was examining and graphing as many as 100 optional positions.
Being very generous to myself with just a little self-serving bias, I struggled to register market-like returns.
I finally acted on my lessons learned and partially abandoned my individual stocks for mutual funds in the early 1980s. I do things incrementally and did not sell my final stock position until about 5 years ago.
My investment workload is now a tiny fraction of what it had been. Thank heavens for that time relief. Especially since my present portfolio is globally diversified and contains several varieties of fixed income holdings. I shutter to thing of the requisite time commitment if I continued to own individual securities.
I made a great decision to turn the day-to-day portfolio operations to professional mutual fund management. I congratulate you on your similar decision using the same logic framework.
Life is sweet for me now; I hope it is for you also.
Best Wishes.