More Information =/ Good Decisions
Information abundance is a thing. And we should be both happy and scared about it.
The sea of information is the reason why we are able to spend hours on our phones every day without blinking.
Does this resonate with you?
You wake up every morning, get out of bed, pick up your phone, and then check your emails, WhatsApp messages, Facebook, Instagram, Twitter, Snapchat, maybe even a few news apps, or your portfolio.
Within the first 10 minutes of your day, you have consumed more information than people did in an entire month a couple of decades ago.
From world order to social circles, information has truly made spending our time easier. But what it also does is make us prone to inaction. Since there is always more information that you can gather. The pursuit of extra information distorts the line between true and false information.
In financial circles, they have a concept called the "cost of acquiring marginal information." And what it basically means is that if the cost or the time spent pursuing additional information outweighs the benefits it provides, the additional information should not be pursued.
Jamie Catherowod has an interesting story about how excess information destroys our ability to differentiate between true and false information and leads to inaction.
During World War II, the allied forces fighting the German invaders devised a plan named "Operation Overlord." The intent of the project was to create confusion and chaos among the German forces, which were residing in German-occupied France.
The plan was to be executed in multiple phases. The first phase was to create confusion and chaos. And to do that, the allied forces came up with a very cunning plan: to overload the enemy with false information. In order to execute the plan, they created dummy soldiers made of gunny sacks and filled them with sand.
These dummies were then tied to a parachute and thrown into the enemy’s territory, where they wouldn’t expect the soldiers to land. The motive behind throwing the fake soldiers into an unexpected terrain was to throw off the German unit from their holding positions. The German army would notice the falling (fake) soldiers and rush over to defend the location, leaving their important posts and locations to fewer or no soldiers.
This decoy would allow the allied forces to attack the strategically important location while there were very few soldiers present. This action would also feed German soldiers with false information that would make them accustomed to false alarms. So when the actual soldiers arrive, they would assume that they are fake and would not engage.
This second aspect of the plan was fascinating to me as it has lots of common ground with the investment industry. The constant flow of information, important or otherwise, makes us believe that there is something happening in the world at every given minute and that it needs our attention. Much like the series of fake Paradummies falling through the sky,
We fail to weigh the impact a piece of information has on our portfolios. Since many a time, nothing really impacts our investments, we get accustomed to not doing anything about it. We get comfortable with our holdings and assume that no information can harm us. (The technical term for this behavior is recency bias.) This behavior of not acting when a new piece of critical information has arrived is what makes us accustomed to false alarms. And we know what happens when the real soldiers fall from the sky after the dummies.
The underlying theme of this post is that what we usually think of as surprises is actually our inability to distinguish between important and unimportant information. In other words, our constant consumption of information makes it difficult for us to distinguish between what information we should react to and what information we shouldn’t. And when we fail to react to important information, we just label it as a surprise and move on.
Takeaway
Keeping track of information that you can do something about can go a long way toward filtering the quality of the information you consume. For example, who gets elected as the prime minister of our country is something that you have a really small influence on. Thus, ignoring such a piece of information while making investment decisions can improve the quality of your actions.
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