Investing 101: Additional Information Only Leads to Confirmation Bias
Sometimes less is more and when it comes to investing it occurs more often than you would think.
If you have read any of my crypto trading posts you know I keep it simple.
- Support/Resistance and Trendlines
- Candlestick Patterns
- Multiple Time Frame Analysis
That is it - done and done.
Fibonacci levels, Elliot Wave theory, Stochastics, MACD and so on...
- I have used them all and they can be great indicators
But in the end, do more indicators actually help?
In 1973 Dr. Paul Slovic did a study consisting of eight professional horse handicappers.
These gentlemen were some of the best and made their living exclusively from betting the ponies.
The study went as such:
Slovic gave the handicappers each five pieces of information about the race (jockey's experience, etc, etc.)
He then had them pick horses for a bunch of races and also asked them what their level of confidence was that they picked the winner.
The results were:
- 19% confidence level
- 17% accuracy on their picks
Not bad at all, the level of confidence was rather in tune with the resulting accuracy of the picks.
Slovic then continued to add more and more information with each round of race picks.
10 pieces of information, then 20 pieces of information.....finally he gave the handicappers 40 pieces of information!
Basically any intel a handicapper could reasonably get their hands on was available.
What was discovered...
The confidence level of the handicappers continually climbed as they received larger sets of information, but their accuracy of picking winners did not.
In fact, when given 40 pieces of information the accuracy was 17% - same as with just five pieces of information!
But here's the thing...
The confidence level of the handicappers shot up to 31% when they had 40 pieces of information.
Conclusion
Turns out more information does not necessarily lead to better results.
Rather, additional information leads to confirmation bias.
Also, the increased confidence may lead to taking on more trades or sub-par trades because of the additional confidence.
When it comes to trading crypto or anything for that matter, don't get overwhelmed and confused with 10 indicators. Understand the action of price and volume and go from there. Nearly all indicators stem from those two things anyway.
I suppose the phrase - keep it simple stupid (kiss) become a thing for a reason!
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Best Regards,
Confirmation Bias is all over Steemit! The vast majority of articles are bullish on cryptos in general, especially Steem.
I've seen really suspect analysis and chart reading without any real substance about technical improvements & implications, business cases, or market adoption.
I definitely agree that more news is simply contributing to confirmation bias that you made a "smart" investment, but the quality of analysis on cryptos in general has been lacking (to say the least)...
Oh boy, yeah don't get me started on that. I feel like I'm the only one on steemit that talks about both the upside targets and downside risks on crypto charts....and that gets me less love cus most people just want to hear everything is going to the moon! lol
Maybe a bit of satire is needed to troll the good news only crowd?
Well, when an entire market sector (like crypto) only goes up and up for months on end it can make it appear that everyone is a 'smart' investor.
Now that many cryptos have been dropping for the past three weeks, who has been making the correct calls? If you can get the ups and the downs, well, you are in the top tier of any analyst.
Your comment got me to wondering if there are any coins that don't follow the general trend of rising and falling together and I discovered about 10 out of the top 100 coins that are actually higher today then they were on Dec. 17 when BTC and the whole market peaked. So a top-tier analyst would have been one who advised to invest in them and not the 90 that are lower today. I seriously doubt such a person exists. Sure, you will find those who talked them up last year, but they are the same ones who talked up some of the 90 I would think.
Pretty interesting that 10 have bucked the trend. I believe STEEM is one if them. What were the others?
Yeah Steem peaked a few days later than BTC, was in a valley for a short while, then had it's record spike and has so far "settled" above where it was in late Dec. The others were NEO, Lisk, Tether, Decred, Gas, Kyber Network, Ignis, Pillar, and Revain.
Thanks for information.
Yes, I read abut that study. More information leads to more confidence but not a better success rate.
Disillusioning, but needful. It is best to stick to your "shtick" and wait out the times when it doesn't work.
That's right. Find a plan that works and then work the plan as opposed to looking for additional info.
Really thanks for sharing this informative post, in my opinion every financial market is associated with the risk so proper study and keeping eye on trends is really important.
Stay Blessed.
This is proven every year by the Melbourne Cup... it's a famous horse race in Melbourne, Australia. Everyone gets a day off to dress up all fancy and bet on the race. 99% of the betters only bet this one day a year. The pros stay the hell away from it because the field is too large (22 horses) and it's too hard to predict. In my anecdotal experience, people with just a little bit of information (trainer, history) beat out the die hard horse racing fans in this one race because the diehards get too caught in the incredible amount of data to process.
The luckiest seem to be the people who bet on the prettiest horse... but I'm not sure that adds any value to your post here.
That's an awesome example mate! Yes, pros are smart to stay away from that race as they have no edge in that size field.
Wise words..KISS philosophy applies for everything
I will try this way in next trade. Thanks for information.
Indicaators can support a hypothesis. However they should never be used to predict a guaranteed outcome.
I think we both agree on that one. I enjoyed reading about a comparison with regard to horse handicapping. Very interesting!
Yeah, I found the study to be relatable to investing. Thanks!
Thanks your post very very important all people who see you post