Know yourself to the next level
Nowadays, people often complain about information overload, and information anxiety follows the fact that information is available through the Internet almost anywhere at any time. The root cause of information anxiety is that people absorb too much information in a short period of time, and the brain center does not have time to break down and digest it, which will cause a series of self-compulsion and tension.
According to the "2023-2024 Mental Health and Industry Crowd Insight Report" jointly released by Simple Psychology and CBNData, among the more than 60,000 randomly sampled data samples, "anxiety" is the most confusing emotional problem for the public, and the pressure and uncertainty in the social environment aggravate the spread of anxiety. In the process of obtaining information, the news channel has changed from a single source of information in the past to a variety of authoritative media and self-media reports, which continuously convey the latest news to investors, while influencing investor sentiment and creating "information anxiety".
There are three main reasons for information anxiety
Group impact
The number one reason for information anxiety is that investors tend to join more groups, but the more groups they are in, the more diverse information they have, and the more difficult it is to digest and deal with it. Marvin Shaw, a group scientist at the University of Florida in the United States, believes that all groups have one thing in common -- there is interaction between group members. He defines a "group" as two or more people who interact over an extended period of time and influence each other in some way, seeing them as "we."
Financial markets are no exception, and investors are heavily influenced by the community. Founded in 1972 as a "small group" of 24 traders, the New York Stock Exchange is now connected to the market electronically by only physical interactions, with most traders electronically connected to the market, forming a "large group" that can access the same quotes on individual terminals, read the same articles published in the financial media, and receive the same instructions issued by the company. Under the influence of group behavior, many investors expect to be integrated into the collective, pursue the state of "being different from others", obtain more information sources, and fear of being isolated or excludedInformation anxiety arises from this, which affects the rational judgment of investors.
Loss of diversity
In the financial markets, price information not only helps investors evaluate the performance of their portfolios, but also influences investors' judgment about the future. Diversity or efficiency is impaired when investors imitate or rely on the same "information waterfalls" that lure market participants to make similar decisions based on the same signals. The loss of diversity represents a collective over- or under-response to information, for example, when there is a negative news or data report in the market, if most investors rely on the same source of information, they may simultaneously take action to sell the asset, causing prices to fall sharply, a phenomenon known as the "herd effect". This collective behavior can cause market prices to rapidly deviate from the intrinsic value of assets, causing the market to overreact and exacerbating market volatility and uncertainty.
On May 3, 1998, the New York Times reported that EntreMed, Inc., a small NASDAQ-listed pharmaceutical company, had made a major breakthrough in the research of new drugs to treat cancer. The news sent the company's share price soaring to $85 from $12.063 in the previous session at the open, closing the day at $51.85 and closing the week at $33.25, and remained at a higher level for the following months. However, from the sources of information, the report is old, because it was reported by the journal Nature and other mass media as early as November 27, 1997, when the company's stock price rose slightly. This case illustrates that over-reacting to information can draw investors' attention to EntreMed and trigger a sustained increase in the company's stock price.
Narrow frame
Information anxiety itself is the result of too much information and fragmentation, which prevents investors from seeing the full picture. In the theory of behavioral finance, it can be explained by a "narrow frame", that is, the "frame" can be imagined as the frame of the camera, because the lens of the frame can only present limited information, so people can only see a part of the framed scenery in the end, that is, the frame describes the investor who does not have a global view when making decisions. In the context of multiple news channels, investors may only focus on specific information and ignore the importance of asset diversification, thereby increasing portfolio risk.
Reasons why emotions affect investors
Get yourself right
Correctly understanding oneself is the first step to get rid of information anxiety. Investors need to understand their investment objectives, risk tolerance and investment horizon in the first place, which can help determine the right investment strategy for them and reduce anxiety due to market volatility. By clarifying their investment goals and strategies, investors can focus more on the information relevant to their investment decisions and avoid flooding with information.
Identify risks
After correctly understanding their own needs, what an outstanding investor needs to do is to create returns and control risks, and identifying risks is the premise of risk control. After obtaining a large number of information sources, some investors will be affected by the lack of risk aversion awareness and information anxiety, and make inappropriate investment decisions. Therefore, the second step away from information anxiety is to identify risk, which implies uncertainty about the imminent outcome and uncertainty about the probability of loss if an unfavorable outcome occurs. In fact, high risk comes with high prices, and when investors realize that they are blindly optimistic and overbid on an asset, they need to remind themselves to identify risks.
Optimize your portfolio
The third step away from information anxiety is to optimize your portfolio. By optimizing the investment portfolio, investors can effectively integrate and process information, clearly set investment goals, and formulate reasonable investment strategies, thereby reducing the anxiety caused by information overload. Asset allocation is the "soul" of a portfolio, its essence is diversification, and the essence of diversification is low correlation. Through reasonable asset allocation, you can avoid the performance of the entire portfolio due to large fluctuations in a certain asset. If all the money is invested in the stock market, you will suffer a lot of losses when the stock market falls. If you spread your money across a variety of assets, such as stocks, bonds, cash, etc., even if one asset underperforms, the performance of other assets may offset the loss, thus keeping the entire portfolio stable.
Bibliography:
1. The Most Important Things to Invest.2019.Howard Marks
2. Lu Rong Lecture Notes on Finance.2019
3. Social Psychology.2014. Myers
4. Huberman G, Regev T. Contagious speculation and a cure for cancer: A nonevent that made stock prices soar[J]. The Journal of Finance, 2001, 56(1): 387–396.
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