Information bias is the tendency to evaluate information even when it is useless in understanding a problem or issue. Today, investors had much more information than before, however, is it all good information? Can this be used to make smart money decisions?
Through social media, we are now being bombarded with new information almost every hour and sometimes every few minutes. Are you one of those who feel research means checking reels on top 3 funds to buy? Checking Youtube videos to confirm your understanding of various investments? Following twitter handles or paying 199 per month for telegram groups to know what is the next multi-bagger? Social media stalking is not detailed research that provides you all the information you need to make a smart investment decision.
Where you are following people online who agree with your viewpoints and speak the things you believe in - you are already following an information bias.
INFORMATION BIAS IN INVESTING
You should ask yourself if some of the information you are getting is relevant at all. Information like daily NAV movement, 52 weeks high or low NAVs, best performing funds of the month, etc. is useless in our view. Should you buy or sell a fund based on its last 7 days or 30 days' performance? However, with interesting captions, they are made to look as if it is very important information that you should pay attention to. But mostly they are irrelevant but excites you into buying a particular fund purely on its return number or performance of the past few months. In many instances, investors will make investment decisions to buy or sell an investment on the basis of short-term movements in the share price.
Likewise, for mutual fund investors, top stocks bought or sold by fund managers every month is mostly not relevant. When you are investing in mutual funds, you rely on professional fund managers to do the stock selection because you do not have their expertise or experience. Top stocks bought or sold by fund managers can be an interesting article on the internet but should you invest in Direct Equity shares based on what a Mutual Fund manager is buying or selling?
The input of information has increased tremendously, now we have people dancing and explaining financial concepts on the net where capturing that information is easy and fun, we may miss out on the crux of the whole thing when learning about finance i..e it is very personal to you. You need to understand what works for your risk profile and your goals before investing in purely basis blogs/videos and others.
HOW TO AVOID INFORMATION BIAS
- Financial planning: Financial planning with clearly defined financial goals and investment plans to achieve different goals can help you avoid information bias. Make sure that you are committed to your financial plan.
- Know the fundamentals of investing: Know what is important and what is not. You need to understand what will make your financial goals successful and filter out the unimportant information.
- Do not track your portfolio on a daily basis: It is important to monitor your portfolio regularly, but you do not need to track it on a daily basis. Short-term price movements have no impact on long-term portfolio returns. If you track your portfolio on a daily basis, then you are likely to be prone to information biases. Remember why you invested and for what goals. You must invest in equity for the long term - so checking it every day is not going to help get higher returns.
- Seek counsel before you react to information: Information that you get every day or every hour usually has no bearing on long-term portfolio performance. If you want, you can seek more information about investments, but seek the guidance of a financial advisor before you act on the information you have. We are SEBI registered investment advisors and can help you make sound investment decisions - you can reach out to us at email@example.com, in order to help you make a financial plan for yourself. A lot of information you get daily may be totally irrelevant and can harm your financial interests, if you act on it without considering other factors.