In Australia today, we must all make important investment decisions for our future wellbeing.
We have an age pension system that acts as an important safety net, but our superannuation system is lump sum, with individuals being ultimately responsible for how their money is invested.
When making those decisions, it is essential (but often difficult) to try to separate the “noise” from the “information”. So, what exactly is the difference.
One way to look at it is that “noise” is the constant clamour of opinion and (over)analysis that clutters the airwaves, cyberspace, radio, television and newspapers every day – with no hard facts to support it. Often this commentary is motivated by people “talking their own book” i.e. wanting to push events in a certain direction because that will benefit them. These people may very well believe what they say, but the fact that they have so much invested in their point of view (emotionally and financially) surely distorts their judgement. It is often difficult to tell when this is happening, but sometimes the forecasts can become extremely shrill. For example, when the oil price was tanking earlier this year, one guy was forecasting a bottom of $10 a barrel. Really! It bottomed at over 3times that level. I wonder what his book looked like.
This is where Human Behaviour often differs from theory. Far from being dispassionate, unemotional calculating machines, we humans are in fact emotional creatures.
In his wonderful book, The Little Book of Behavioral Investing, James Montier reports that analysts are far too quick in responding to noise, but far too slow in responding to important information.
When advising clients, we always keep in mind the difference between “noise” and “information”. It is not easy, and sometimes we are wrong, but better decision making needs to bear the distinction in mind.
What has all this got to do with “elections” and “Brexit”? Well, lots. During these events there is, inevitably, an awful lot of noise. Searching for any real information amongst the noise is challenging.