How “Information Overload” May Be Affecting Your Mutual Fund Investments

If you believe that information is always powerful when it comes to investing, it could surprise you to learn that the opposite may in fact be true! On the contrary, too much information could cloud your judgment and lead to unsound investing decisions.

Master Investor Warren Buffet, for one, is not one to focus overtly on the next quarters earnings or descend into vast pools of data and information before deciding to buy or sell a stock. “Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That’s all I’m trying to do.”, he once famously said about his “investment technique”.

There’s something really interesting about information and its significance when it comes to decision making, though. Paul Slovic, in his paper titled “"Behavioural Problems of Adhering to a Decision Policy”, used racehorses and bookies to arrive at the conclusion that beyond a certain threshold, incremental information on a given subject (such as investing, for instance) does not improve accuracy of decision making – which is to say, accuracy flatlines at a point, despite adding on new information. However, confidence continues to increase with every new piece of information added. In other words, more information may not necessarily lead to more accuracy in your investment decision making – but it will most likely make you more confident!

What makes the matter more interesting is that when it comes to computing, more information indeed does appear to be better – a separate study by Tsai, Kalyman and Hastie titled “Effect of Amount of Information on judgment accuracy and confidence” proved that the predictive accuracy of a computing model increased from 56 per cent to 71 per cent when new information about predictive outcomes related to college football games was introduced. When the same information was presented to human evaluators, accuracy did not increase with the increase in information!

The tendency to seek out mountains of information before making investment decisions is accompanied by another interesting behavioural bias known as the “confirmatory bias” – the tendency to unconsciously seek out data and information that corroborate and validate your existing viewpoint! For instance, if you’re firmly bearish on the markets right now after the recent fall in Adani group stocks, you’re more likely to seek out information that confirms your point of view - while ignoring other information that may be suggesting that the long term India growth story remains strong as ever. How can that be fruitful?  

There’s an important lesson in all this for Mutual Fund investors, especially novice ones. One, don’t get so caught up in your own worldview (bullish/bearish) that you remain oblivious to information that could be suggesting a different course from what you have in mind. Two, don’t take advice from too many sources or read the views of every single so called “expert”, with the mistake belief that more information will empower you. In fact, you should limit the data points that you look at online before selecting a fund. More than lagging indicators such as short term past returns, you should focus on things like fund manager pedigree and track record, fund philosophy and the actual degree of adherence to it, vintage, performance in challenging markets and best quarter/worst quarter returns.

Checking off the above points will empower you adequately to make a sound investment decision. Try not to get into the nuances of timing the market to capture a single days NAV movement, or whether the top 10 holdings are great or not. Remember, Mutual Funds are meant to be “hands off” investment avenues. It’s best to pick good funds based on minimal but critical information points, and let the Fund Managers do the rest!