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Last Updated : May 13, 2019 10:38 AM IST | Source: Moneycontrol.com

Viewpoint | Information paradox – less is more

We want every scrap of information we can get and yet, we make foolhardy decisions while investing.

Moneycontrol Contributor @moneycontrolcom

Nithin Sasikumar

“All of humanity's problems stem from man's inability to sit quietly in a room alone.”- Blaise Pascal

We are information junkies. It’s an addiction that we cannot get over. We have gone from an environment where there was a paucity of information to one where it’s cheap and in abundance. Instead of searching for more information, we need to find ways to filter it, because whether you’d like to believe it or not, we’re actually worse off for all the excess that comes into our email inboxes and our social media.

For models built around artificial intelligence (AI), more is better but human brains are not computers and we have limited processing capabilities. We are in a race against time to constantly read and update ourselves on everything under the sun. We’re worried about what the central bank is doing with its policy rates, which government is coming to power, will Britain have a hard or soft Brexit, who combs prince George’s hair every morning, will China and the US begin a trade war, the quarterly earnings results of companies.

I slipped in a completely random thought there, because why not. It’s a never-ending show. And then there’s clickbait, ‘These are the top midcap funds for 2019’, ‘Multibagger opportunities in small caps’, ‘Economist who called the sub-prime crisis says a recession is coming’. If they knew all these answers, why would anyone share it freely with you? But no, we still click and we’re soon drowning in a veritable vortex of information.

An article in Industry Tap says that according to Buckminster Fuller who created the ‘Knowledge Doubling Curve’, until the 1900s, human knowledge doubled very century and as per estimates of IBM, it will soon be doubling every 12 hours. Knowledge is distilled information so just imagine the amount of data that gets processed every second that then becomes information which is available for us.

A look at data centres of Amazon or Flipkart should tell us something. And what this information overload and its accessibility is doing is that one minute I’m reading a book, the next minute I’m looking up something that’s mentioned in it and before I know it, I’m watching a subject talk on YouTube which then leads me to a Tupac Shakur song on life’s troubles. A short attention span I tell you.

Now add complexity to it. Complexity attracts us, especially financial service professionals because we love to show off our competence or what we believe is the incompetence of the other person. Simple models and products are scoffed at because we think that if it’s simple, everyone’s doing it and we all love to be unique.

Aswath Damodaran has said of Discounted Cash Flow (DCF) models that the less is more strategy often works better as the fewer variables you use, the lesser your chances of mistakes. Which means all those complex models you see with a hundred different items aren’t really adding to the accuracy of the output.

And there’s a body of research covering diverse segments like bookmakers, car buyers, equity research analysts and football fans that shows not only does too much of information lead to poorer decisions but it also increases overconfidence in one’s estimates. We want every scrap of information we can get and yet, we make foolhardy decisions.

This myopia is not just harming us mentally (social media addiction) but also affects our financial lives. The opportunity to get distracted is immense and if we don’t tune yourself out completely while taking important financial decisions, we’ll probably ending up making a mess of it.

It could be something as simple as the kind of risks you’re comfortable with or it could be more complex like deciding insurance policies that are a right fit for you or whether you should use that bonus to pre-pay that home loan that comes with tax perks. A proper financial plan will ensure that you’re not losing sight of the forest for the trees.

Now as investors, how’re you filtering the information and what do you act upon? The truth is that you act upon very little. Or you practice what Charlie Munger calls ‘sit on your ass investing’. Less is more when sifting through the noise. In a world of easy clicks, you click less.

I know of people who’ve even stopped reading the newspapers because well, they claim it is yesterday’s news anyway. So, limit the sources of your information – if you’re following a hundred different policy experts, economists, personal finance gurus, fund managers, cut it down. Make a small list of columnists and experts (I’d say no more than ten) you admire but who have different points of view so that you’re not blindly listening to just one side of the story.

Throw away your honorary ‘being busy’ badge and take the time to reflect and embrace some downtime. Create a simple checklist for yourself with not more than 3 to 4 questions that’ll help you make a decision. And when you do take a decision, write down your rationale. That’s how you convert the information into knowledge and how you use that comes from experience. Let’s not have to pay a high price for our short attention spans.

(The author is Co-founder and Head of Research at Investography.)
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First Published on May 13, 2019 10:38 am
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