“As investors, we need to be exceptionally careful about how we consume information and how that influences our decision- making.”
According to a recent survey by the American Press Institute, nearly two thirds of American adults say they look at the news at least several times a day1. If you are reading this, we suspect you fall into this camp. Most of us are consuming more news, and more often, than we were several decades ago.
And what about the quality of the news we’re getting? There is significant competition in the news media industry today. Producing and distributing news is far less expensive and easier to do than in years past. While there are still many journalists who do great work, the quality of what many of us consume through cable news networks, social media, online news sources, and print publications is often not very high quality, yet we continue viewing it.
As investors, we need to be exceptionally careful about how we consume information and how that influences our decision-making. There are a few behavioral biases we experience to varying degrees that are worth keeping in mind as we navigate the 24-hour news cycle.
Confirmation bias is the tendency to look for and notice information that confirms one’s original beliefs and ignores the information that contradicts those beliefs. As Warren Buffet said, “what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” With the plethora of news sources available, it is easy to watch programs and read publications that cater to our own beliefs. To combat this inherent bias, we need to seek competing opinions that challenge our existing views, as difficult as that process might be.
Availability bias is the heuristic approach to estimating the probability of an outcome based on how easily the outcome comes to mind. Most people have at least a moderate fear of sharks when swimming in the ocean. The reality is that people more likely to be killed by a moose2 than by a shark in the water3; still, most people fear sharks more. Why? Well, it’s easier and scarier to imagine being eaten by a shark than being attacked by a moose and since the shark attack scenario comes to mind more easily, that’s more likely to influence our behavior. Our obsession with news and current events is the perfect fuel for availability bias and can lead us to make all sorts of irrational decisions based on the most recent or most shocking stories we hear.
Negativity bias is the natural tendency, all else equal, to put greater weight on negative information than positive information. Historically, this was probably a survival mechanism as it allowed our ancestors to be more alert to potential sources of danger. News producers are aware of this, which is why we can always hear ten times as many negative news stories as positive ones—people naturally care more about the negative ones. The problem is that surrounding ourselves with negative information can lead to a more pessimistic view of the world, the markets, and the economy than what might be appropriate.
While swearing off the news completely might be unrealistic, there are a few actions we can take to ensure the news is helping us make better decisions rather than working against us.
- Pay careful attention to whether the news we consume is catering to our current beliefs, and actively seek alternate viewpoints.
- Stop checking the news multiple times throughout the day. We are unlikely to learn anything that will significantly improve any decisions we’re making, and the recency and availability of the information may actually end up skewing us away from rational decision-making.
- Related to #2, instead of spending time reading the barrage of news, focus on reading longer form research articles and books that have stood the test of time. These provide a deeper level of insight, expand our knowledge base, and will improve decision-making.
- Be aware that negativity bias is fueled by frightening information and look for ways of finding information that doesn’t sensationalize or dramatize the story.
- Document decision-making processes. As investors, we should always have a written investment plan that will guide us and prevent us from getting caught up by emotions and recent events.
Taking a step back from the quantity and the type of news consumed doesn’t mean one is taking current events less seriously. However, freeing up time for content that contributes to cognitive development may greatly improve decision-making, allow one to get off the emotional roller-coaster of sensationalist media, and contribute to a greater sense of peace of mind.
1 https://www.americanpressinstitute.org/publications/ reports/survey-research/americans-news-consumption/
2 https://animals.howstuffworks.com/ animal-facts/dangerous-moose.htm
3 https://en.wikipedia.org/wiki/Shark_attack#targetText=In%20the%20United%20States%2C %20 even,than%201%20in%20264.1%20mil
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