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PR Newswire
29-12-2013, 08:27 AM
MORE INFORMATION IS NOT NECESSARILY A GOOD THING
Many investors give little or not thought as to how they actually go about making decisions. One bias they have is: I know better, because I know more. The illusion of knowledge is the tendency for people to believe that the accuracy of their forecasts increases with more information. The simple truth is that more information is not necessarily better information. Another bias: I can make a judgment based on what it looks like. Companies that have seen growth in the previous five years are forecast by analysts to continue to see very high earnings growth in the next five years.
Analysts are effectively looking at the company’s past performance and saying this company has been great, and hence it will continue to be great.
Analysts fail to understand that earnings growth is a highly mean-reverting process over a 5 year period.
Effectively, analysts judge companies by how they appear, rather than how likely they are to sustain their competitive edge with a growing earnings base. Another bias of investors: that is not the way I remember it.
Our minds are not supercomputers, or even good filing cabinets.
They bear more resemblance to post-it notes that have been thrown into the bin, and covered in coffee, which we then try to unfold and read. People are more likely to recall vivid, well-publicized or recent information.
Simonsohn Et Al hypothesizes that one reason for overweighting of direct experience is the impact of emotion. “Directly experienced information triggers emotional reactions which vicarious information doesn’t.” investors experience will be a major determinant of their perception of reality.
Many investors give little or not thought as to how they actually go about making decisions. One bias they have is: I know better, because I know more. The illusion of knowledge is the tendency for people to believe that the accuracy of their forecasts increases with more information. The simple truth is that more information is not necessarily better information. Another bias: I can make a judgment based on what it looks like. Companies that have seen growth in the previous five years are forecast by analysts to continue to see very high earnings growth in the next five years.
Analysts are effectively looking at the company’s past performance and saying this company has been great, and hence it will continue to be great.
Analysts fail to understand that earnings growth is a highly mean-reverting process over a 5 year period.
Effectively, analysts judge companies by how they appear, rather than how likely they are to sustain their competitive edge with a growing earnings base. Another bias of investors: that is not the way I remember it.
Our minds are not supercomputers, or even good filing cabinets.
They bear more resemblance to post-it notes that have been thrown into the bin, and covered in coffee, which we then try to unfold and read. People are more likely to recall vivid, well-publicized or recent information.
Simonsohn Et Al hypothesizes that one reason for overweighting of direct experience is the impact of emotion. “Directly experienced information triggers emotional reactions which vicarious information doesn’t.” investors experience will be a major determinant of their perception of reality.
WB:-
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.