Information Overload
The Rime of the Ancient Mariner once lamented, “Water, water everywhere but not a drop to drink.” Today, as we stare down the most uncertainty we have seen in our investing lifetimes, we face a comparable situation: information everywhere, and no idea how to process it. Will we fall deep into depression, or will we rebound quickly? No one, at this point, has any real answer. The information we might use to reach some type of conclusion is everywhere. What we must prevent is the human tendency to interpret vague or ambiguous information in a biased way. We must avoid the H-Factor.
Confirming the Bias
When overloaded by information, we are forced to pick and choose relevant details. If we’re convinced COVID-19 is the end of civilization, we’ll focus on the bad news. If we’re convinced it’s no worse than the flu, we’ll focus on information suggesting it’s not that bad. This is confirmation bias. We hear what we want to hear to support our prior beliefs.
This bias occurs because we’re not programmed to change our mind. Call it resolving cognitive dissonance or just call it wishful thinking -the unfortunate reality is our mind creates a thesis first and then accumulates supporting data, not the other way around. And when we’re presented with contradictory information, our mind actively works to suppress that information. It’s one cause of the H-Factor and it’s what Charlie Munger called, “a superpower in error-causing psychological tendency.”1 We’re often merely intensifying the commitment to our previously-held opinions, particularly when it involves publicly pronounced beliefs.
Hard to believe? Look at our leadership. Until things took a serious turn, what did our president say? As recently as March 4, President Trump asserted, in reference to the World Health Organization’s claim of a 3.4% COVID-19 fatality rate, “Well, I think the 3.4% is really a false number. Now this is just my hunch…. Personally, I would say the number is way under 1%.”2 The president wanted to believe the fatality rate was low and so, despite reliable and authoritative claims it was much higher, prevented himself from accepting the information objectively.
But confirmation bias doesn’t merely downplay the severity of the crisis. In fact, the opposite might also occur. Those convinced COVID-19 will be catastrophic tend to focus only on the negative. We’ve all seen science fiction movies about catastrophes and pandemics. They range from authentic, near-documentaries to downright silly scarefests based on junk science. Those serious ones are realistic enough for us to be entertained yet, at a certain level, they seep into our subconscious. It’s easy to disregard a zombie apocalypse. But, somewhere deep down, we know how much worse Chernobyl or the Ebola virus outbreak could have been. We get anxious. We get fearful. And our decision-making is subconsciously impacted. Then, when a new catastrophe strikes, we’re primed to confirm those deep-seated fears. Troubling information is weighted too heavily, while comforting information is underweighted or dismissed outright.
Opinions Running Rampant
This tendency is well established by psychology researchers that study anxiety disorders such as obsessive-compulsive disorder (OCD). Patients with OCD will dwell on negative information. “All or nothing thinking,” and, “Catastrophizing,” are examples of confirmation bias at its worst. When presented with an overabundance of information—as we seemingly all are in this COVID-19 crisis—patients are offered too many options to support their obsessive compulsion. Some might say it’s the H-Factor at its worst and most paralyzing.
Right now, as we try to predict the outcome of a completely unprecedented crisis, it’s easy to fear the worst. Compound that with an overabundance of information and our innate predisposition to confirm preexisting opinions, and many are setting themselves up to panic. Those suffering from a clinical diagnosis of OCD thankfully have medical options for relief and remediation.
For those of us lucky enough to avoid the affliction, we have the threat of the H-Factor to contend with. The key to controlling it is the recognition of its existence, and then the ability to strip it away. Rely only on the data as it’s presented. Do not infer anything based on pre-existing bias.
In the next part of this 3-part series, we explore so-called “fake news,” the recognition of its dangerous results and similar attempts at mitigation. Control your biases. Know when human biases are affecting your decision making. Think objectively.
1 https://www.gurufocus.com/news/834366/charlie-munger-bias-from-consistency-and-commitment-tendency
2 https://www.businessinsider.com/trump-claim-death-rate-coronavirus-word-health-organization-2020-3
DisclosuresThis document is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. We discuss general market activity, industry or sector trends, or other broad-based economic or market conditions and this should not be construed as research, securities recommendations or investment advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Any forecasts or predictions are subject to high levels of uncertainty that may affect actual performance. Accordingly, all such predictions should be viewed as merely representative of a broad range of possible outcomes.
No client or prospective client should assume that any information presented in this document serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha or any other investment professional. Any charts, graphs or tables used in this fact sheet are for illustrative purposes only and should not be construed as providing investment advice and should not be construed by a client or a prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice.
Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. An investor in the strategy may experience a loss. Information contained herein does not reflect the actual performance of the strategy. All research and data is simulated and should not be considered indicative of the skill of New Age Alpha. You cannot invest directly in an index. This presentation does not include the deduction of any fees and expenses because an index does not have any such fees or expenses, such as management fees or transactions costs. Investments in securities will generally include fees and expenses that will decrease investment returns. The performance results reflect the reinvestment of dividends and interest.
All New Age Alpha trademarks are owned by New Age Alpha LLC. All other company or product names mentioned herein, including S&P®, Dow Jones®, GICS and MSCI are the property of their respective owners and should not be deemed to be an endorsement of any New Age Alpha product, portfolio or strategy. S&P Dow Jones S&P® is a registered trademark of Standard & Poor's Financial Services LLC (”SPFS”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (”Dow Jones”).
The mention of any specific individuals, books, or related references in this article is for informational purposes only. It does not imply any endorsement or affiliation with the mentioned individuals or entities.
The information provided in this article is for informational purposes only and is not intended as a substitute for professional medical advice, diagnosis, or treatment.
H-FactorHuman FactorTM “H-Factor” scores are being provided for illustrative purposes only and should not be construed as providing investment advice or as a recommendation to buy or sell any particular security. Human Factor scores are hypothetical in nature, do not reflect actual investments results and are not guarantees of future results. Human Factor scores measure the probability that, according to the Human Factor algorithm, a company will deliver the growth necessary to support its stock price and are not alone a recommendation about how to invest. The Human Factor is a risk that comes from humans interpreting vague or ambiguous information in a systematically incorrect way. We believe that the Human Factor causes stocks to be mispriced. We measure how the Human Factor affects stock prices to identify which stocks are over or under priced. We apply our methodology to over 5300 stocks and global indexes to identify a risk that impacts stock prices and is caused by human behavior. Investments not included in the H-Factor tool may have characteristics similar or superior to those being analyzed. The accuracy of the Human Factor is materially reliant on the integrity of the information utilized in the calculations, including any assumptions and or interpretations made by the user about the data. Data discrepancies, user assumptions, and data input by user can all contribute to differing outcomes. The underlying assumptions and processes presented herein are subject to change. Furthermore, any Human Factor score referenced herein is a snapshot taken at a particular point in time and any analysis or information contained in such score is outdated and should not be relied upon as investment advice as such information may have materially changed since publication.
© New Age Alpha LLC, 2024
CC: NAA10412 | SKU: 10204
Co-Written by Julian Koski, Co-Founder and Chief Investment Officer and Andy Kern, Senior Portfolio Manager