Information overload: how it hurts investors

Our information-based society is often plagued by excesses. Information overload exists in many areas of daily life, but the investment sector is likely to be the area with the most serious consequences. The less financial knowledge and understanding people have, the worse they can cope.

An important survey on this issue published in 2005 by Julie Agnew and Lisa Szykman (Professor of Mason School of Business at the College of William and Mary, Virginia) in the Journal of Behavioral Finance showed that the financial knowledge of low-level people is particularly overloaded Impact, this leads them to take the path of least resistance, which is the “default option” in a fixed contribution (DC) retirement plan. Many people are just at a loss and can’t cope at all.

Effective use of investment information

For many people, financial security and peace of mind depend on making correct financial decisions now and in the future. However, more and more evidence shows that too many people have made very bad decisions, and many people are unable to make a decision at all.

Some investors inevitably have too little information, while others have too much information, which can lead to panic, or make wrong decisions, or believe in the wrong people. When people are exposed to too much information, they tend to withdraw from the decision-making process and reduce their efforts. (By the way, lack of information, which can be called “underload” may produce the same result, and of course it is equally dangerous).

In other words, simply providing people with information about investment choices may not be enough to make rational and reasonable decisions.Investment information not only needs to be sufficient and not overwhelming, but it also needs to be easy to use, in fact Yes used. This is a very real problem and may bring dire consequences.

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Specific reasons for overload

Agnew and Szykman tell us that there are three main reasons for information overload. One is scalar. The second factor is too many options (although too few is not good), and the third factor is the similarity of options. If everything looks the same, distinguishing one option from another can be confusing and difficult. We will use their findings to extend to ordinary investors, not just contributors to the DC project.

Also important in the use of information is the level of the investor finance Knowledge-that is, the knowledge directly related to the investment process. Theoretical economics or general business knowledge may not help at all, and it is too far from the details of fund management. What we are talking about here is the understanding of how to invest in practice, what is effective and what is not.

Research shows that many investors do not even have a basic understanding of financial concepts. This is more applicable to people with lower incomes. Not surprisingly, people who have never had a lot of money have almost no investment practice. For this reason, it is not uncommon for people who suddenly win the lottery or inherit an inheritance to be at a loss-initially in a figurative sense and then in a literal sense.

Consequences of overload

Wandering through the information maze can make people easily misled—that is, imposing very bad and inappropriate investments on them. These may be too risky, too conservative or not diverse enough, just to name three classic horror events. In short, an investor’s investment is only profitable for the seller, or it is just easy to sell and has no trouble to manage.

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In their experiments, Agnew and Szykman found that those who do not deal with investment information would only choose the “default option”, which is the easiest to do. They didn’t bother to find out what is best for them. In the real world of investment, this is indeed dangerous. An investment that is completely risk-free-such as cash-does not return in the long run.This option may result in insufficient retirement funds, almost everyone should have Some stock.

In contrast, owning too many stocks or weird and bizarre funds, assets and certificates are very volatile and can win or lose a lot of wealth for you. Most investors don’t want such risks, and often don’t know that they are taking them until disaster strikes. This kind of investment portfolio can bring wealth, if you are lucky, if you are not, it will lead to poverty. For most people, whether it is psychologically or financially, it is not worth gambling.

Coping with information overload

This can be done from both sides of the market. Brokers, banks, etc. need to ensure that they only provide investors with what they really need to know, and it must be simple and easy to understand. The point is that ordinary investors need to be fully informed (but not more) what can help them make the right decision. There is a clear optimal state, beyond which a dysfunctional overload will occur. Of course, too little is also bad. For the seller, it is also absolutely necessary to ensure that the information is understood and translated into appropriate investment decisions.

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If investors themselves find themselves overwhelmed by information and do not have the skills or time to figure out and use it, they need to go back to the seller and ask them to provide concise information that they can use. If this cannot be provided, it is best to take your own money and business elsewhere.

Investors themselves really need to work hard to find what suits them. As mentioned above, this can be daunting, but for this reason, sellers and regulators need to convey the message that the more they know and the more they know, the safer the investment process.

Inevitably there will be some people who cannot or will not understand the information and use it. This may be due to lack of education or fear of money, some people are just not prepared to worry about their money. These people really need some kind of independent consultant they can trust.

Bottom line

An important research project of Mason Business School tells us that the financial services industry has a very serious problem of information overload (or the antonym of “underload”). Ensuring investors have the best amount of information they can (and does) understand and actually use as a basis for decision-making is easier said than done. But it must be done; both the industry and investors themselves need to be proactive in solving problems. The diversity of potential investments and the changing nature of the relevant markets mean that the continuous, mutually beneficial and productive process of information provision and utilization is absolutely vital to people’s financial future and peace of mind.


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