Investments: are you being hoodwinked by fancy graphics?
Investing is serious business. With your money at stake, it’s essential to focus on objective figures and block out all those elaborate success stories that just seem too good to be true. But what if you have to make a quick decision and need to take all that information quickly? Having the data depicted as an image can be really helpful, but are these images as useful as they seem? Or are they preventing you from seeing the bigger picture?
In our myLIFE article “Investments: a few true stories that are worth thinking about” we told you two anecdotes that showed how our cognitive biases affect our decisions, particularly our financial decisions. We learnt how our brains are story-telling machines, constantly working hard to give meaning to the world around us. But we also saw how they sometimes piece together the different elements to create a narrative that best suits us.
You might thinking you’re immune to this. That you’re a data master, adept at drawing the key facts from easy-to-understand data visuals. But is that really the case?
The difference between looking and seeing
In finance, we are constantly bombarded with infographics. These images showing data at a glance are all the rage because they let us make quick, rational decisions based on facts and figures presented without any bias – or at least that’s the theory. In practice we still need our brain to play along and not manipulate the data before our eyes.
Researcher Rod Duclos studies this phenomenon. He has carried out five studies covering behavioural experiments and eye-tracking technology. The various participants were given graphs showing the 30-day share price trend of a fictitious company and asked whether or not they would invest in that company.
In each experiment, the share price distributions had been set up to end the 30 days at more or less the same level as at the start The most recent movements were therefore no more informative or meaningful than older ones. However, the analysis of how the participants viewed the data suggested that investors are most heavily swayed by the most recent share price fluctuations. In fact, almost all the investors homed in on whether the share price had closed up or down against the previous day.
The participants had a whole host of information at their disposal but tended to base their decision of whether to invest in this unknown company solely on the latest changes in its price.
This finding suggests that if investors view financial information as an image, they might assess it differently than if they were looking at raw data, potentially biasing their investment decisions.
And the implications of this are troubling. We all know full well that markets don’t always follow clear trends and that economic data should be taken with a pinch of salt. Yet a simple image showing the latest changes to a share price – however insignificant – can sway or even mislead investors.
It would appear that our brain influences how we view market volatility without us even realising. Being faced with huge quantities of data seems to distort our decision-making. Instead of seeing the bigger picture, we focus on specific data points – regardless of whether they are relevant – in order to spin ourselves a tale that confirms what we think we’re seeing.
But don’t panic – there is some good news. When Rod Duclos showed the participants the same data as figures rather than images, they were much better at spotting the lack of a general trend and corrected their investment decision. This is why you should always have financial experts help you manage your investments. They are trained to see past window-dressing and are well aware of the old adage that past performance is no guarantee of future returns.
The moral of the story: remember that an image is a story and, like everything else it sees, your brain will interpret it as it sees fit. Don’t get taken in by fancy graphics. Look at the raw data and speak to experts with the skills, experience and time to analyse it properly.
If investors view financial information as an image, they might assess it differently than if they were looking at raw data, potentially biasing their investment decisions.