Attention response is the tendency to incorrectly estimate the frequency or severity of an event based on recent exposure to it. Consider how when people hear of, for example, a recent shark attack or plane crash, they may believe these types of events happen far more frequently than they actually do. They may fear swimming after learning of a shark attack, or flying after learning of a plane crash. Yet, in reality, the likelihood of being killed by a shark is one in 3.7 million.
The media is more than happy to play to our fears of, for example, the false notions that the next shark attack or plane crash is imminent. Applying this to investing, a study showed how the media can shape our investment decision-making.
In Andreassen's study, who got better returns? News watchers or ignorers?1
Daily news watching can actually have detrimental effects on our investment decision making. This is because most people tend to focus on recent events, rather than on their long-term effects.
In a Harvard University study by Paul Andreassen, three groups of people were asked to select stocks for a portfolio. The only instruction they received was to "'buy shares for less than you sell them,' and 'sell them before they go down.'" In other words, buy low, sell high.
The first group received no stock market news.
The second group received real, timely stock market news.
The third group received outdated stock market news, news that had already affected stock prices.
The results were interesting...The group that received current market news traded more often than those who watched no news, and also had a "reduced tendency" to buy low and sell high. And they didn’t do as well as those who watched no news. Those who received outdated news did about the same as those who received no news...and they made twice as much as those who were up to date on the latest news developments.
Most people tend to think that watching more news equates to having more information that is important to making better investment decisions. However, this study showed that not only do the media not always get it right, but that not having any news may actually help our decision making. It also shows that people also often overestimate the long-term effects of short-term events.
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