Too Much Information

With so much information available about a company and its stock price, how much information do you really need in order to make a decision? Is too much information a wonderful thing when it comes to selecting stocks to buy?

If you ask the average stock analysts how much information they need to evaluate a stock, I’m sure you will hear numbers that reach into the mid teens and higher.

The Value Line Investment Survey has been published for over 70 years, and tracks 1,700 stocks. A Value Line stock page provides a wealth of information on a given company. The page has over 50 pieces of information. In the statistical array table alone there are 23 different pieces of historical financial data going back at least 10 years.

Source: valueline.com

Looking at the Value Line page for the first time can be very intimidating when trying to value a business. But have no fear, you don’t have to focus on all 50 pieces of information. In fact, studies have shown that more is truly less in this case.

Using experts in a variety of fields as test subjects, experimental psychologists have examined the relationship between the amount of information available to the experts, the accuracy of judgments they make based on this information, and the experts’ confidence in the accuracy of these judgments. (Heuer Jr., Richards J., Psychology of Intelligence Analysis. Center for the Study of Intelligence, Central Intelligence Agency, 1999, p. 51.)

They did the experiments by controlling the information they made available to the experts and they checked the accuracy of their judgments based on that information.

And They’re Off…

One such experiment was done on horse handicappers.

Similar to stock investing, there is a myriad of past performance data on horses. For this experiment, they chose eight experienced horse handicappers and showed them a list of 88 variables found in publications like the Daily Racing Form.