Category: Your Money

We live in an era of information overload – the 18 hour business channel, endlessly refreshing twitter streams and news feeds. Our brains just haven’t evolved fast enough to keep pace with the bombardment of information. Add the typical uncertainties of investing into the mix and our brains just can’t cope. However, that doesn’t prevent us from seeking incremental information. We tend to believe that if we just had a “bit more” information, we may arrive at “better” decisions. But this is not necessarily true.

Consider the experiment outlined in “On the Pursuit and Misuse of Useless Information,” by Bastardi and Shafir (pdf).

Group I

Question:

You are considering registering for a course in your major that has very interesting subject matter and will not be offered again before you graduate. While the course is reputed to be taught by an excellent professor, you have just discovered that he will be on leave, and that a less popular professor will be teaching the course.
Do you:

1. Decide to register for the course? [82%]
2. Decide not to register for the course? [18%]

(the percentage of participants who chose each option appears in brackets)

So a large majority (82%) of respondents effectively doesn’t care about the teacher, and cares only about the course.

Group II

Another set of students were asked the uncertain version of the question:

You are considering registering for a course in your major that has very interesting subject matter and will not be offered again before you graduate. While the course is reputed to be taught by an excellent professor, you have just discovered that he may be on leave. It will not be known until tomorrow if the regular professor will teach the course or if a less popular professor will.

Do you:

1. Decide to register for the course? [42%]
2. Decide not to register for the course? [2%]
3. Wait until tomorrow? [56%]

Here, 56% of the respondents believe that if they just had that incremental piece of information, they’ll make a better decision.

Group II Followup

Here’s the follow up question to the same set of (Group II) students who chose (3) in the question above:

It is the next day, and you find out that the less popular professor will be teaching the course.

Do you:

1. Decide to register for the course? [29%]
2. Decide not to register for the course? [27%]

Therefore, the new distribution of overall preferences under the “uncertain version”:

1. Decide to register for the course [42% + 29% = 71%]
2. Decide not to register for the course [2% + 27% = 29%]

Whereas before, under the “simple version,” 82% chose to take the course, in the “uncertain version,” after the introduction of a piece of information that we know to be useless, only 71% chose to take the course.

So not only do we lust after incremental information that is useless, but once we get them, we assign too much value to them.

h/t TurnkeyAnalyst

Related

• The illusion of knowledge
• The value of publicly available information is zero
• The Little Book of Behavioral Investing: Information Overload