Does information make us more informed or more confused?
Is too much information making investment decision making too hard? Turn on the TV or Radio or pick up a newspaper and media is crowded by three events; politics finance and sport. In the case of finance, it sometimes feels that the amount of information available that could impact the value of your investments (good or bad) is ever increasing and increasingly complex. What might reasonably be considered good news causes values to decrease and vice versa.
There are myriads of commentators, opinions, researchers, economists, newsletters, free reports and more all aimed at keeping us informed, but are we? Or, are we just more confused and becoming information junkies hooked on the latest insight into China, Ben Bernanke’s thinking, the RBA’s decision on interest rates, employment/unemployment data and more.
It has been said that Sunday’s New York Times contains more information than a medieval peasant would have encountered throughout his entire life.
This was supported by a French economist Georges Anderla who estimated that human knowledge had doubled between 1 AD and 1500. It doubled again by 1750 and again by 1900. He then stated that the doubling then took place at an ever faster pace, with the next occurring after 50 years, then 10, then seven and finally six years and this was just to 1973 – the year he published his theory. By then, he estimated, the amount of human knowledge in 1973 was 128 times greater than in the year 1 AD.
By the late 1980s, it was claimed information was doubling every 18 months. And this was before the Internet became as powerful as it is and it follows that today information is growing at a rate that few can predict and even fewer comprehend and interpret. Even the conservative IBM made the claim back in 2007 that by 2010, information would be doubling every 11 hours.
So given unprecedented access to data, and information and thoughts and opinions, have we become wiser decision-makers? After all, shouldn’t it follow that information improves decisions? Not necessarily so, says John Payne of Duke University in the USA. Payne believes that the wealth of information available today for decision-making can actually lead to a state of ‘information overload’. For many people, a wealth of information may lead to more confusion than clarity, and consequently having too much information can sometimes feel like the worst of times when it comes to making decisions. Furthermore, as a result of information overload, the potential exists for us to enter an age of foolishness in decision making, not an age of wisdom.”
Consider this then in the context of making long term investment decisions that will impact your standard of living and ability to fund that for many years! How can an investor today (let alone tomorrow) be expected to make a sound, well-formed decision given the plethora of confusing and often conflicting information that bombards them? The answer for most is that they can’t. So they will either rely on someone or some organisation that can (or promises it can) do it for them or seek to simplify choices and do it themselves. If they choose a 3rd party, then it is unlikely that the 3rd party will offer simple outcomes (after all the investor may be able to achieve that for themselves). So even though the investor’s decision may have been simplified, their investment decisions will still be based on complexity and ever increasing data and thus the issue remains, it’s just become a bit more expensive.
Given this some investors will likely opt for the path less complex and look to simplify their choices and decision making to that which they can understand, where they don’t need to read endless research reports, subscribe to newsletters and be hooked on the latest finance report on TV or radio. This will inevitably lead to investments that are less volatile, more predictable, where risks and rewards are transparent and the ability to determine suitability to achieve desired outcomes easy to make. Investing in commercial real estate backed first mortgages could be one such investment