Ignorance Really Is Bliss When It Comes to Investing

Investors have more information than ever and it not only isn’t helping—it’s hurting. Here’s the fascinating reason why

By Spencer Jakab of The WSJ. 

The optimal thing to do is to keep producing a good or consuming a good up to the point where marginal cost = marginal benefit. If the MC of attaining more information is greater than the marginal benefit, then that is too much. It might seem strange to say, but you could have too much information.

Excerpts: 

"In 1973 psychologist Paul Slovic gathered eight talented handicappers to guess the outcome of 40 actual horse races in four rounds. The names of the jockeys and steeds were hidden, but the handicappers could ask for five pieces of information from a set list of 88. They were also asked to say how confident they felt. The handicappers did well, reaching 17% accuracy compared with 10% if they had guessed blindly. Their confidence was almost exactly right too at 19%. In the next three rounds they could ask for 10, 20 and finally 40 bits of information and their level of conviction rose steadily, reaching 34%. But their accuracy? It stayed at 17%.

At least knowing more didn’t do any harm. At a real horse track, though, or in the stock market, detailed knowledge emboldens people to make riskier bets. And, since most people aren’t experts at either horses or stocks, reports making confident predictions filled with complicated calculations or claiming inside knowledge can override the common sense of pros and amateurs alike.

In October 2001, with suspicions swirling, five Goldman Sachs analysts wrote an 11-page report calling Enron “still the best of the best” after they had extensive conversations with top management: “our confidence level is high.” The stock rallied by as much as 8% over the next two trading sessions, but Enron would file for America’s largest-ever bankruptcy within weeks.

When millions of young investors opened their first brokerage accounts during the pandemic’s first year, many took cues from “finfluencers” who spoke their language or from peers using pseudonyms."

"The problem with crowdsourcing research on social media is that people mainly find evidence that supports their existing thesis. Psychologists call this confirmation bias."

"bias is overwhelmingly bullish."

"A report by FactSet last April showed that, of 10,821 analyst ratings on stocks in the S&P 500, fewer than 6% were sell recommendations. "

"Leigh Drogen founded a firm called Estimize that queries pros and amateurs on things like earnings estimates. Its polls are more accurate than the consensus of stock analysts, but not always. He says that snapping up every bit of data and expecting it to work consistently often tripped up his clients.

“Paying attention to five things in a highly efficient, systematic way will always beat paying attention to 50 in an undisciplined way,” he says."

"The more often one looks at a financial account the more likely one is to see a loss and, since losses bother us more than gains, they spur turnover. Investors who trade the least often make the most, and vice versa, even after adjusting for trading costs, according to a landmark study “Trading Is Hazardous to Your Wealth” by professors Brad Barber and Terrance Odean."

"The explosion of financial data and the ease of instantly trading on it also creates more mistakes"

"Some investors made fortunes accidentally buying Sysco, the restaurant-supply giant, instead of Cisco Systems, the computer-networking company"