Ep 251 | When More Information Hurts Your Decision Making Ability (REPLAY)

Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast, where we believe that every single day brings a new opportunity to get better. Let's dive right in. Today I am revisiting a recent topic of ours, decision-making, but specifically I want to talk about the effect of information on decision-making. Frankly, having too much information and what that might do to you. I'm going to tell you a story, a story that I've seen quoted a handful of places, uh, and, and maybe you've heard it before too, but I'm going to share it nonetheless. In the mid-'70s, a guy named Paul Slovic, uh, who was a world-class psychologist and a peer of Daniel Kahneman, who is a genius himself, psychologist, and talks about thinking quite a bit. Paul Slovic decided to evaluate the effect of information on decision-making. What he did was gather 8 professional horse handicappers, you know, guys that bet on horse races, and he announced to them, I want to see how well all of you predict the winners of horse races. Now, all of these handicappers were seasoned professionals. They actually made their livings based solely on their gambling skills. So they'd been around the block. Slovik says to them, he says, hey, I want to test— I want to test you. And here's what we're going to do. We're going to have 40 horse races in 4 consecutive rounds. In the first round, every one of you, every gambler, is going to be given 5 pieces of information that he wants on the horse. Just 5 pieces of information. And that information might vary from handicapper to handicapper. So they could all choose different information they wanted. They just can only have 5 pieces. So one handicapper might want years of experience of the jockey as one of his top 5 variables, and another might want, you know, uh, highest finish of a horse in previous races. Whatever the case, they each would get 5 pieces of information. Uh, in addition to asking the handicappers who was going to predict the winner of each race, he asked each one to also state how confident that, that handicapper was in his prediction. So again, 5 pieces of information in round 1, pick a winner, and then tell me how How confident are you in your prediction? Now, as it turns out, there was an average of 10 horses in each race. So we would expect then by blind chance or random guessing, each handicapper should be right about 10% of the time and that their confidence with a blind guess should be 10%. Again, 10 horses in a race, you know, these handicappers each picking one horse randomly, there's a 10% chance of being right. So that's what you'd expect. So in round 1, with just 5 pieces of information, when he ran this experiment, the handicappers were 17% accurate, which is actually pretty good. It means it's— they were 70% better than the 10% chance they would have started with given 0 pieces of information and just throwing a dart at a board. Their confidence was 19%, which is almost exactly as confident as they should have been. They were 17% accurate and 19% confident in their predictions. Now, in round 2, they were given 10 pieces of information, and in round 3, they were given 20 pieces of information, and in the last round, round 4, they were given 40 pieces of information. That's a heck of a lot more than the 5 pieces that they were given in round 1. Surprisingly though, their accuracy had flatlined at 17%. They were no more accurate with the additional 35 pieces of information. However, their confidence nearly doubled. It went to 34%. So remember, in round 1, 17% accuracy, 19% confidence is what they— what the handicappers had rated. But in round 4, where they had 8 times more information, they had the exact same result in terms of accuracy with more information, but their confidence level nearly doubled from round 1. So the additional information made them no more accurate but a lot more confident. This would have led them to increase the size of their bets and likely lose money as a result. So what we've learned, what he discovered, what Paul Slovic discovered, was beyond a certain minimum amount, additional information only feeds what psychologists call confirmation bias. It feeds confirmation bias. The information we gain that conflicts with our original assessment or conclusion, we tend to just ignore it or dismiss it, while the information that confirms our original decision makes us increasingly certain that our conclusion was correct. That experiment is, is, is amazing to me because I think we can all kind of think through scenarios where we had limited information and had to make a decision and said, man, I wish I had more info. I wish I could have more detail. And in certain situations, you actually get more detail and you think because you have more detail, you're actually going to be more accurate. But what we've learned from this, this study, and there's others like it, is that there is a minimum amount of information you need, but that you kind of reach a point of diminishing returns, or I should say a point of no return in that after a certain bit of information, more info you get doesn't make you more accurate. It just makes you more confident. And that's not necessarily a good thing. Let's think about real estate investment, you know, where many of us were investing. Let's say we're buying a home, a rental home, and we've got to take data, take information, and make a, make a, you know, an educated decision as to whether to proceed. Let's say, let's say I'm buying a rental home. Now, one thing that I like to do, and we've talked about it before, is leverage Charlie Munger's law of inversion. I like to invert. So instead of asking myself, why would this rental house make for a great one? I would ask the question, what would make this rental house a bad one? What would make this one underperform and not meet the standard that I have in mind? Now, when I ask that question, here's exactly where my mind goes. I immediately go to, well, if I made less rent than I expected, Well, yeah, that is a good answer in my opinion, but that's really a symptom of a bigger problem when I'm analyzing a property. The bigger problem is, yeah, less rent, but what drives less rent? Maybe it's the, the local area deters the type of people I'm looking for to pay that amount of rent. Maybe the local area income level is not supportive of the type of rent I'm looking for. Maybe there's too much competition on the market. Maybe there are repairs to be done that I just didn't account for. I was too optimistic versus being a lot more realistic. My point here is, in running through this, is I could probably come up with another 2, 3, 4, 5 factors. But once I get— come up with this, you know, the total of 5, 6, 7 different factors to weigh a— or to consider a rental property, I have enough information at that point to make an educated decision using this, the information from the study we just went through. After I have those 5, 6, 7 points, me learning more intricate details around a variety of things is likely not to aid me in making a more accurate decision, but it is likely to make me more confident and confirm some of my own biases. So the focusing question for you today: where does this show up in your life? Where are you on information overload? Maybe are having a paralysis by analysis, but the reality is you already have all the information you need. And where might more information simply make you more confident but not necessarily more accurate? In addition, when you're making decisions, and now that you know you don't need every single point, you just need the most important points, what processes can you put in place to make certain that the 5 or 6 or 8, whatever the minimum needs to be, that you have the 5, 6, 7, 8 minimum points of information that are the also the most valuable points of information? What process do you need to have so that you know you are reviewing the most important priority data, which therefore gives you the degree of accuracy you desire. And all the other secondary points may just confirm, you know, your bias or give you more confidence. I think it's a really fascinating thing to think around. And I encourage everybody, everybody at the No Days Off Nation to leverage this, this new information you know, that we discussed here today and put it into practice. That's all I have for you today, the No Days Off Podcast. Thank you so much for listening. And remember, every single day brings a new opportunity to get better. So let's get after it.