One of the major issues emerging from the never ending flow of information with which we are being constantly bombarded is the complete breakdown in our ability to make decisions and to choose a course of action. Every bit of information we receive presents us with a choice – do we need to pay attention to it?, does it need to be factored into our decisions?, do we need to reply?, can we simply ignore it? The list goes on and on. Research has shown that when faced with too much choice people are likely to make no decision at all, or to make poor decisions out of frustration.
In a 2004 study at Columbia University, researchers found that the more information and choices people were given in regard to their 401(k) plans (essentially their superannuation funds) the more they made no choice and simply opted out of making a decision. As the number of choices rose from 2 to 11, participation fell from 75% to 70%. When they were presented with 59 options from which to choose, participation fell to 61%. People were simply too over-whelmed to make a decision. Those that did choose from the 59 options available chose lower return options! In essence, with more information available to them, they made worse choices.
In a similar study, when volunteers were given more information about more options to purchase in an online store, they consistently chose lower quality options. In her new book “The Art of Choosing” Sheena Iyengar, the researcher who conducted the studies cited above highlights the fact that decision making becomes progressively harder and harder as the amount of information available becomes greater leading to paralysis and inaction rather than an informed and confident decision.
From a share trading perspective those using fundamental analysis or relying on the opinions of others can easily suffer from this inaction. Inundated with information, often conflicting, about a company’s financial position, coupled with differing reports in various media, these investors are prone to inaction. Instead of being armed with information with which to take decisive action, they find themselves unable to reach a clear decision caused by the sheer volume of information they are trying to digest.