Can the internet make us overconfident in our ability to make financial decisions?

So much information, so little time

Recall my November 7th article, Is the internet a wealth equalizer?, and how I presented the case that perhaps the internet was not the great information and wealth equalizer that many claimed.

Even the World Bank has said that the internet has been increasing income and wealth inequality. Those who know how to use the internet to their advantage have seen tremendous growth in their personal wealth.

Which means that for the vast majority of humanity, technological innovators such as the internet have actually helped to undermine their level of financial wealth, and I have an idea why. For people who invest and make financial decisions based on subconscious emotion, unrecognized biases, social media influences, or their favorite blogger, the internet has been a net negative. It makes it easy for them to indulge in their bad financial behavior.

Is the internet a wealth equalizer? – November 7th

Most people only unwittingly use the internet and social media to reaffirm their preexisting ideas and beliefs. While this may make us feel better with respect to the political divide, it can often be lethal with investment decisions.

The internet usually contains the proper data in some form for just about every subject and idea, but trying to locate it can be an arduous task. To make matters worse, our confirmation biases can preclude us incorporating the correct data points into our choices. Moreover, we need to figure out how much information is enough; when do we stop the search for data points and act?

Can More Information Lead to Worse Investment Decisions?

Expanding on my original research, a reader of my blog sent me an article today titled, Can More Information Lead to Worse Investment Decisions?, and it dovetails with my original theories. It’s author, Joe Wiggins, explains that having access to additional information can actually make us overconfident in our abilities to make proper decisions.

When we come into possession of more, seemingly relevant, information our belief that we are making the right decision can be emboldened even if there is no justification for this shift in confidence levels.

Can More Information Lead to Worse Investment Decisions? (Behavioral Investment, January 9th)

For many new investors, this overconfidence can often be lethal. Just look at those young investors who got caught up in the crypto craze. There’s a lot of information out there at our fingertips, but much of it is often irrelevant, even erroneous, or formulated by disingenuous promoters and shills.

There are so many data points and pieces of information available on the internet and many can easily become overwhelmed when attempting to decipher the necessary information. We face many potential drawbacks, most notably the challenge of disentangling signals from a blizzard of noise in order to make consistent decisions.

First, overconfidence is one of the largest and most ubiquitous of the many biases to which human judgment is vulnerable.

The second way overconfidence earns its title as the mother of all biases is by giving the other decision-making biases teeth.

Overconfidence – Psychology Today (January 22, 2018)

On many occasions, having additional evidence to support a decision may simply be a repetition of prior information (merely in a different guise) or be erroneous with no predictive power (a major problem in an environment marked by uncertainty and randomness where things that look like they matter, actually do not).

As we receive more information, therefore, we are prone to believe that we are more accurate in our decisions, when there is often no justification for this. This can create an anomalous situation where behavior consistent with being diligent and thorough, actually results in worse investment decisions being made.

Can More Information Lead to Worse Investment Decisions? (Behavioral Investment, January 9th)

Keep it simple

Over the years, I have developed a set of heuristics that assist in my data collection efforts. When it comes to making investment and trading decisions, very often my correct conclusions are the ones that are the easiest to explain to others. The research on my blog incorporates 34 years of financial education and a lot of trial and error. My heuristics are the culmination of all these experiences.

We need to be confident in our abilities without becoming overly confident. There is no substitute for experience; the more we are exposed to the outside world, the more wisdom we gain. With this wisdom, we will find the information overload more manageable as we can more successfully wade through the blizzard of endless data.

It may be fine to follow certain experts in a field, but if they are usually wrong, perhaps it’s time to look to others who have better track records.