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Information Bias in real life investing

I was reading the book, The Art of Thinking Clearly by Rolf Dobelli.  The book talks about various biases we as humans carry in our lives.  The one bias which caught my immediate attention is “Information Bias”.  Rolf Dobelli says that decisions taken based on bare facts have proved to be very effective compared to decisions taken after hours and hours of analysis of all available information.

I agree to his contention that most of decisions we take or don’t take in real lives is due to information overload.  We tend to collect and process too much information before taking a particular decision, let it be buying a refrigerator or a financial product.  Particularly, I have seen there is a greater tendency to collect so much information before buying a financial product or service, and finally take a very stupid decision.  This not only applies to investors but also to the Financial Advisors.

Take the example of choosing a mutual fund.

  • An initial filter is run to choose Mutual Fund Schemes which has provided better than category returns over different time periods like 1, 3, 5, 10 and if possible 20 year horizon
  • Then typically investors go for the risk adjusted return numbers like Sharpe Ratio, Sortino Ratio, Beta etc.,
  • Follow that up Analyse the portfolio of the scheme to determine the sectoral weightages and then dig little deeper to understand how the funds stack up across different market capitalisations
  • Then in addition to the information bias we are talking about, other qualitative inputs like the fund manager’s perceived capabilities are brought in to the picture

Finally, after analysing so much of data, you end up with little or no clarity as compared to the beginning of the exercise.  This phenomenon is exactly called the “information bias”.

I am not against analysing the various parameters before choosing a mutual fund, but it is better to stick to some basic fundamental concepts.  The success of a particular investment depends on how you implement the decision in a disciplined manner.

The same logic applies in almost all aspects of decision making.  We should learn to take decisions based on bare essential fundamental information.

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