As a way of giving ourselves a break from writing new Insights during the busiest portion of the summer it has become an annual tradition to repost this series on some of the various pitfalls of obsessively consuming news and information. These posts contain timeless wisdom that we constantly need to be reminded of, and we think they have become even more relevant over the past several years since first written in 2014. Enjoy!
“News is to the mind what sugar is to the body.” – Rolf Dobelli
As investment advisors, part of our daily routine includes consuming a steady diet of financial news and analysis. It’s important to us that we know and understand the various factors impacting the performance of global capital markets - and more importantly our clients’ investment portfolios. However, the role of this type of ongoing research needs to be properly understood and contextualized in order prevent common pitfalls from occurring. Staying up to speed on the news allows us to provide effective communication and education for our clients. It also might give us a slight edge from time to time when making high level asset allocation decisions. However, it does not allow us to predict the future with any certainty, and there is no guarantee that it will even make us better money managers over the course of our career.
Today we reintroduce a four-part Weekly Insight series on how the regular consumption of news might actually be detrimental to your decision making, particularly when it comes to personal finances and investments. This theme was inspired by an interview from several years back with one of our favorite financial bloggers, Josh Brown (aka “The Reformed Broker”). While his delivery can sometimes be a bit edgy, Josh’s writing is refreshingly candid and insightful, and it is very different from anything else out there. The interview below is a must watch and relates to Josh’s book, Clash of the Financial Pundits.
A little bit of additional research on this topic turned up a paper by Rolf Dobelli entitled Avoid News: Towards a Healthy News Diet in which Mr. Dobelli lays out his arguments that “news is to the mind what sugar is for the body”…
News is easy to digest. The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking. That’s why we experience almost no saturation. … we can swallow limitless quantities of news flashes, like bright-colored candies for the mind.
The bulk of Dobelli’s paper is spent laying out the fifteen “toxic dangers” of news. We will be covering five of these dangers in each of the first three installments in this series, and we will wrap things up with a post on how all of it plays into our decision making and investment disciplines.
Danger #1: News misleads us systematically
The delivery of modern news, by its very nature, is designed to focus on what captures our attention rather than on what really matters. Our brains are wired to be drawn to what is highly visible. Things that are, according to Dobelli’s description, “large, scandalous, sensational, shocking, people-related, story-formatted, fast changing, loud, graphic onslaughts of stimuli.” Meanwhile, we have limited time and energy to dedicate to “more subtle pieces of intelligence that are small, abstract, ambivalent, complex, slow to develop and quiet.” In short, news reports do not represent the real world.
The result of this danger is that over time we develop opinions and emotional connections with all the wrong things. Dobelli calls this having the wrong “risk map”. For instance, the negative effects of chronic stress might not appear anywhere on our radar even as we walk around irrationally stressed by the prospect of being the next victim of a plane crash or terrorist attack.
Danger #2: News is irrelevant
Dobelli begins his discussion of this danger by posing the following challenge:
Out of the approximately 10,000 news stories you have read in the last 12 months, name one that – because you consumed it – allowed you to make a better decision about a serious matter affecting your life, your career, your business…
The fact of the matter is that when presented with the extensive buffet of daily news flow, we are hard pressed to identify the few morsels (if any) that are actually relevant to what really matters in our life. Media outlets are more concerned with presenting us with what’s new, rather than with what’s relevant, and they want us to believe consuming their news feed will provide us with some sort of edge in life. This premise should be seriously questioned.
Danger #3: News limits understanding
Dobelli says that “news items are little bubbles popping on the surface of a deeper world”. Knowing a lot of facts might give us a broad-based knowledge of what is going on, but this should not be confused with an understanding of why or how. In fact, sometimes the plethora of factoids floating around in our minds can prevent us from really seeing and understanding the big picture. Rather, as Dobelli describes, “The important stories are non-stories: slow, powerful movements that develop below the journalists’ radar but have a transforming effect.”
Danger #4: News is toxic to your body
This one might sound a little far-fetched at first, but bear with us! News flow often focuses on negative events and themes since these are the headlines that are most likely to grab our attention. There have been plenty of scientific studies that have shown that people who inundate themselves with negative news are more likely to experience a decrease in happiness. Additionally, as Dobelli points out in his paper, our bodies are designed to release additional amounts of cortisol (the stress hormone) in reaction to negative news, leading to chronic tension and anxiety.
Danger #5: News massively increases cognitive errors
There are a plethora of cognitive errors investors fall prey to in the management of their money. Many of these errors are related to one another, and most of them are reinforced by the amount and form of news we consume. Here are a couple of examples…
This is our mental bias to seek out and pay attention to information that confirms what we already believe, rather than information that might challenge and dissuade our current convictions. What’s more…the more information we gather along these lines the more certain we become that our beliefs are right. A great article explaining this bias is How to Ignore the Yes-Man in Your Head published several years ago by the Wall Street Journal.
Story Bias and Ambiguity Aversion
As Dobelli states in his paper, “Our brains crave stories that ‘make sense’ – even if they don’t correspond to reality.” Investors don’t like the presence of ambiguity, and thus will grasp for any available explanation of market occurrences in order to feed a feeling of certainty and conviction. Having an explanation for something gives us the illusion of being in control and feeds our desire to feel confident in our decisions.
Reading the news does not necessarily create these cognitive errors, but it can feed them if we are not careful and self-aware.
Hopefully this has started the wheels turning on the real value offered by the steady inundation of news that we are subjected to in our information-heavy, mobile-enabled world. Are we carefully parsing out the noise from the real value-add journalism? Are we setting aside time and energy to focus patiently on truly understanding the topics and issues most relevant to our life? Are we allowing the constant flow of negativity to affect our moods and outlook? And finally, are we allowing our own news-consumption habits to feed common cognitive errors in our ways of thinking? These are all important questions to consider, particularly as it pertains to our daily financial and investment-related decisions. We will continue the discussion next week with a review of dangers 6-10 from Dobelli’s paper.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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