INVESTORS AND INFORMATION OVERLOAD
In the advent of technology, information overload prevails in the world, specifically in the investment sector. If investors are not equipped with the right amount of financial knowledge and understanding, they can experience difficulty when digesting too much details. Based on the Journal of Behavioral Finance by Julie Agnew and Lisa Szykman, both professors at The College of William and Mary, individuals with low level of financial literacy suffer from overload, resulting to making bad decisions and passivity.
Information overload is a condition which emerges because humans have limited cognitive capacity to process details. Such condition has been widely studied in several disciplines, including accounting, marketing, management, and management information systems (MIS). When investors experience overload, it can affect their judgment, causing them to constrict their information search and employ simple heuristic instead.
Financial security and peace of mind, for most people, depend on making right financial decisions today and in the future. However, many individuals end up creating very poor decisions or not making decisions at all.
Investors have with too little or too much information. Either way, both are dangerous as it can lead to panic, making bad decisions, or trusting wrong individuals. Worse, they tend to withdraw from the decision-making process and cut their efforts. So it is not sufficient to provide people with details regarding investment options. Information should not only be enough without being overwhelming, it also has to be useful and easy to use.
There are three major causes of information overload: pure quantity, too many (or few) options, and option similarity. The investor’s financial knowledge level plays a vital role in the usage of information because knowledge is directly correlated to the investment process. It is more of an individual’s awareness of the investment practices. Unfortunately, according to the same journal, many of them have no fundamental understanding of financial concepts.
A throng of information can lead investors to misselling. Either they become too risky, conservative, or inadequately undiversified, among others. In other words, they pick investments lucrative only to the seller, or that are easy to sell and manage. These investors just go for the default option because they do not want to bother themselves finding the best investments. But an investment which utterly lacks risk won’t pay off in the long run.
On the other hand, too many stocks or exotic assets, certificates, and assets is extremely uncertain, which can make you win or lose a substantial amount of money. However, majority of investors do not want to take risks, but unaware they are getting such. It can lead to wealth or poverty.
How to contend with information overload?
For brokers, banks, and other financial institutions, provide investors with necessary details. No more, no less. In essence, investors need to be given just the right information level or what can help them make right decisions. It must be easy to comprehend.
For investors, if you are facing this hurdle and have no idea on how to figure it out and use it, go back to the seller and demand for a precise information that can be used in investing. If they fail to do so, put your investments somewhere else.
Supposedly, investors themselves should exert more effort to differentiate information underload and information overload. Yes, this process can be daunting and exhausting. But this is a serious problem investors should address among themselves or risk losing your capital. They can always seek the advice of an independent advisor just to be sure.
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