The T4Trade trading platform enables users to explore market opportunities, taking their trading to the next level by providing access to more than 300 tradable instruments covering six separate asset classes, all from within a single trading platform. This article will look at information bias and its potential to negatively impact investment decisions.
Investment bias occurs where data or information is recorded or measured incorrectly, with the result that it no longer accurately reflects the truth. This form of bias can occur due to a simple error in data collection or processing. Alternatively, it could arise from a person’s subconscious tendency to filter information to conform to their pre-existing beliefs, or it may even be the result of deliberate distortion.
Information bias can have a great deal of sway over investor choices, culminating in sub-optimal decisions and even dangerous investment choices. Unfortunately, information bias is also incredibly common. Human beings have an innate inclination towards confirmation bias, i.e. seeking out and prioritising information that fits their preconceived notions while simultaneously dismissing contradictory evidence. In addition, recency bias is also prevalent, with more weight placed on newer, more salient information than is appropriate.
In an increasingly digitised age, where constant connectivity and social media reign supreme, it is more important than ever for investors and traders to be aware of the types of information they receive and how they can impact investment decisions.
Decisions based on faulty data and inaccurate information can lead to poor financial outcomes. Due largely to the proliferation of social media, it has become easier than ever before for investors to access vast amounts of data. Nevertheless, this information is only as good as its source.
In terms of decision making, investors can attach undue weight to a single tweet or news report, ignoring the broader context of the market as a whole or a particular company’s performance. In addition, investors may subconsciously seek out information that backs up their preconceived beliefs about a company, downplaying contradictory evidence or ignoring it completely.
Conversely, research shows that investors who focus only on relevant information, avoiding information bias, tend to make better investment decisions. For example, research by behavioural economists Terrence Odean and Brad M. Barber revealed that individual investors who paid less attention to stock market news and traded less frequently achieved better results.
Recency bias, confirmation bias and asymmetric information are all factors investors should take care to eliminate to help them make smarter investment choices.
Disclaimer: This material is for general informational & educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.