Too Much Information Impacts Investment Decisions

SUSIE GHARIB: Technology has revolutionized investing in many ways, especially when it comes it to the delivery of investment information. Well, now even the smallest investor has an even — has an almost limitless amount of information and investment choices. But does that lead to better decisions about money? In tonight’s segment of “Your Mind and Your Money,” Dan Grech says today’s crush of information has implications that no one could foresee a hundred or more years ago.

DAN GRECH, NIGHTLY BUSINESS REPORT CORRESPONDENT: For investors, Thomas Edison’s real breakthrough wasn’t the light bulb. It was his improvement of the stock ticker. Until it came on the scene, you had to be on Wall Street to get stock prices quickly. But Edison’s ticker tape changed that, bringing real time stock information to investors everywhere. Now some 140 years later, investors can’t seem to get enough information or get it fast enough. Here’s an example of that, a typical market information web site. Let’s call it grechbiz. At a single glance you see the stock market crawl, major market indices, currency exchange rates, commodity prices, foreign market data and for good measure, video from a congressional hearing. But does this ocean of information help us make better investment decisions? Or does it simply fool us into thinking we are making a better decision?

MICHAEL JAWITZ, INVESTOR: The stock that I got my whole life in is down 50. So how smart am I?

GRECH: In the pre-Internet age Michael Jawitz was a professional stock trader. Now retired he day trades from his home computer. He says getting information online is fantastic.

JAWITZ: Before people from either experience or by studying or asking the right people, got all the knowledge in their head. Now I think people don’t have to think so much. They just rely on their computer. I know I do.

GRECH: But Jawitz says seeing breaking news can give an investor the false sense of having an extra edge.

JAWITZ: So the news is out there, very quickly. But by the time we see it, the stocks are already up or down. So you might benefit from it, but not as much as you might think.

GRECH: Jawitz may have the right idea. Studies show that having more information can make investors overconfident, leading them to do more trading. But they also show that increased trading often doesn’t translate into making more money. Here’s another piece of conventional wisdom. The more investment choices the better, right? Maybe not. Take this experiment involving 24 varieties of gourmet jams. First one group of people was allowed to sample only six of the jams. Then a second group was allowed to sample all of the 24 types. You might think that the customers that had more choices would buy more jams. But that didn’t happen. Turns out, the group that was given fewer choices bought 10 times more than the other group. Swarthmore Professor Barry Schwartz says that shows too many choices can pose a problem.

BARRY SCHWARTZ, PROFESSOR, SWARTHMORE COLLEGE: When people have a lot of options to choose from, chances are there is no one option that is the best in every way. And that means that you have to make trade- offs. You have to compare things and give up one good thing to get another, perhaps better thing. People don’t like to make trade-offs.

GRECH: So when people are asked to commit to an investment from a range of choices, they worry that they will regret their decision. As a result, Schwartz says their response is often inertia. They choose to do nothing. But he says that can be a mistake.

SCHWARTZ: Now not deciding is not benign. Sometimes it can be extremely consequential. When people don’t put money into their 401(k)s for the first five years because they can’t figure out which fund to put their money into, it’s going to have major consequences down the road when they retire.

GRECH: So when you have to choose between different investments, don’t be intimidated. Although making a choice requires a little extra effort, the end result can be worth it. Dan Grech, NIGHTLY BUSINESS REPORT, Miami.

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