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I can’t think – Part 3 – Total Overwhelm

August 24, 2011
11 people like this post.

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.

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11 people like this post.

Comments

  • Robin Moseby says:

    Very interesting information. Trading systems can suffer from the same problem particularly in volatile market conditions. Once one has developed or embraced a trading system then one needs to stick to it and not be attracted to the next shiny new system that promises to master the current market.

  • Mark says:

    There is only a few decisions that can be made.

    Buy
    Sell
    Hold
    Trandslated
    Up
    Down
    Sideways
    Further Translation
    Higher High, Higher Low
    Lower High, Lower Low
    Everything in between

    The next major decision is timeframe.

    I have found the best option is to use ONLY 1 timeframe and ONLY 1 timeperiod , otherwise there are too many conflicting decisions to make and a longer period often gives a fallback “EXCUSE” which always ends in disaster.

  • Graham says:

    Gary, do you have a link to that Columbia University study?

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