It is without question that investors now have easy access to more information than ever to guide decision making; optically, this surfeit of data appears to be a positive – who doesn’t want more ‘evidence’ to inform their judgements? Yet there are a number of potential drawbacks, most notably the challenge of disentangling signals from a blizzard of noise in order to make consistent decisions. For this post, I want to specifically address the potential consequences of information growth and its impact on our precision and confidence levels. Whilst we often believe that more information can improve our accuracy (the number of correct decisions we make), in certain situations all it may be doing is increasing our (unfounded) confidence.
There have been a number of studies in this area, the majority of which reach similar conclusions. Tsai, Klayman and Hastie (2008)[i], tested the impact of additional information on an individual’s ability to predict the results of college football games and their confidence in doing so correctly. Participants in the study had to forecast a winner for a number of games based on anonymised statistical information. The information came in blocks of 6 (so for the first round of predictions the participant had 6 pieces of data) and after each round of predictions they were given another block of information, up to 5 blocks (or 30 data points), and had to update their views. Participants were asked to predict both the winner and their confidence in their judgement between 50% and 100%. The aim of the experiment was to understand how increased information impacted both accuracy and confidence.
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