INFORMATION OVERLOAD: WHEN LESS IS MORE

When faced with a decision, people typically like to conduct some level of research before making a commitment. Whether it’s thumbing through Consumer Reports or simply asking a friend’s opinion, we all like to affirm the decisions we’re about to make. With the abundance of information now present on the World Wide Web, research at all levels is made both easier and harder for the same reason: there’s more information available and it’s easier to access.

There are, no doubt, certain areas in our lives where we tend to spend more time in analysis and research. One of those is investing and finances. Everyone knows that decisions about your investments have the potential to positively or negatively affect the rest of your life. Knowing the magnitude of those decisions, investors are somewhat reluctant to make them for fear they’ll do the wrong thing. Playing into that reluctancy is the fact that Wall Street encourages investors to research and gather facts. Consider the advice Jim Cramer, host of Mad Money, gives in his book Sane Investing in an Insane World:

"I think the rigors of the market demand one hour per week per stock to stay on top of it. You have to read every report, from the quarterlies to the annuals, you have to read every important article, you have to listen to all of the conference calls, and you have to read the analysts’ reports. That’s the basic homework you have to do. I know that seems excessive. But you would do much more research if you were going to buy a car or a home, and yet, a stock is every bit as big an investment."

When investors are told that much time and energy should be committed to research and analysis, is it any wonder so many feel helpless when it comes to making decisions? And that’s just for picking stocks. Consider other investment decisions they feel faced with: when to get out of the market, when to get back in, which advisor to use, which investment vehicle is best. There is an endless matrix of choices. In the end, many of them do just what Cramer suggests and absorb themselves in information. In reality, however, extensive research and analysis can be counterproductive.

In his book, Blink!, Malcolm Gladwell outlines a real-life example of how more information can actually delay progress. Brendan Reilly is chair of the Department of Medicine at Cook County Hospital in Chicago. When he first took the job, the hospital was overcrowded and understaffed to the point that people seeking help in the emergency room were waiting hours for an initial consultation. One of the most common complaints was chest pains. Because, in each

case, the possibility of or potential for a heart attack had to be seriously considered, chest pain patients were requiring more time and resources. After all questioning and testing had been done, doctors were correctly assessing chest pain patients 75 to 89 percent of the time.

Reilly then had ER employees use an algorithm — an equation of sorts — developed by a cardiologist named Lee Goldman. The formula looked at electrocardiogram results and paired those with the answer to only three questions related to the person’s pain, lungs and blood pressure. Information on the person’s medical history, lifestyle, and physical condition, no matter what those were, wasn’t necessary and was only complicating the diagnoses. Goldman determined and Reilly confirmed—after two years of application in the emergency room—that less was more when it came to assessing chest pains. The algorithm method correctly determined heart attack occurrence and risk more than 95 percent of the time. When examiners became bogged down with additional details, even details that seemed to be accurate indicators of heart attacks, they were less accurate.

Less is more. Investors may think, or may have been told, that the more information they collect before making investment decisions, the smarter their choices will be. In fact, the opposite is often true. It’s a phenomenon frequently referred to as "paralysis by analysis." You can get so much information and so many details that it actually leads you to a wrong decision or keeps you from making one altogether.

So what’s the answer? The same thing it was for Brendan Reilly at Cook County Hospital. Back off of the problem. Zoom out and focus on just the essential items and the rest will fall into place. In investing, those essential items are an understanding of how the free market system works and how it has performed over the past 80 years. That’s it. Once you know and understand factors influencing the market as a whole and how it tends to move, you don’t need anything else. You invest in a system that’s tried and true and let it do the work.

Making decisions is not easy, but in trying to simplify the process, we need to make sure we’re not actually complicating matters. Perhaps Gladwell put it best: In good decision making, frugality matters.

 

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