As we continue our series on “Behavioral Biases”, we sought the expertise once again of the academic staff at www.Investopedia.com to discuss “Limited Attention Span Bias”. Before we highlight their comments on this topic, we felt it helpful to provide an overview of how the broad phenomenon of something that leads to “Limited Attention Span Bias, Bounded Rationality” can lead to poor decision-making.
According to https://en.wikipedia.org/wiki/Bounded_rationality “Bounded Rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal. Limitations include the difficulty of the problem requiring a decision, the cognitive capability of the mind, and the time available to make the decision. Decision-makers, in this view, act as satisfiers, seeking a satisfactory solution, with everything that they have at the moment rather than an optimal solution. Therefore, humans do not undertake a full cost-benefit analysis to determine the optimal decision, but rather, choose an option that fulfills their adequacy criteria. An example of this being within organizations when they must adhere to the operating conditions of their company, this has the opportunity to result in bounded rationality as the organization is not able to choose the optimal option.”
As in life in general, this insidious condition weaves its way into the investment process. According to Investopedia; “There are thousands of stocks to choose from but the individual investor has neither the time nor the desire to research each. Humans are constrained by what economist and psychologist Herbert Simon called, “bounded rationality.” This theory states that a human will make decisions based on the limited knowledge they can accumulate. Instead of making the most efficient decision, they’ll make the most satisfactory decision. Because of these limitations, investors tend to consider only stocks that come to their attention through websites, financial media, friends, and family, or other sources outside of their own research. For example, if a certain biotech stock gains FDA approval for a blockbuster drug, the move to the upside could be magnified because the reported news catches the eye of investors. Smaller news about the same stock may cause a very little market reaction because it doesn’t reach the media. How to Avoid This Bias. Recognize that the media has an effect on your trading activities. Learning to research and evaluate stocks that are both well-known and “off the beaten path” might reveal lucrative trades that you would have never found if you waited for them to come to you. Don’t let media noise impact your decisions. Instead, use the media as one data point among many.”
Wow, we could not have said it better ourselves. We view the Financial Media as only one data point and certainly agree with Investopedia’s description of “Noise” when defining how bombastic the Press can get.
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