Could Government Shutdown Ease Investors' Analysis Paralysis?
Data crunchers around the world are mourning the likely loss of Friday’s jobs report and a host of other economic indicators to the government shutdown.
But given the propensity of investors and policymakers alike to suffer from information overload, this doesn’t really sound like the end of the world.
“Could this be, perversely, a good thing for capital markets?” Nicholas Colas, chief market strategist at ConvergEx Group, wrote in a note on Tuesday. “Numerous academic studies over the years show that more information isn’t always good for decision-making. A little goes a long way, and a lot just leads to needless overconfidence.”
It’s not like market participants will be flying blind as Washington struggles to play nice.
While the Friday jobs report won’t be revealed during the shutdown, this week alone investors will get their hands on at least 10 pieces of new economic data in addition to speeches from 10 Federal Reserve officials -- including Ben Bernanke.
And that’s not even counting more than two dozen major new reports from governments and private forecasters overseas.
“The trouble with the ‘more is better’ approach to decision making is that humans don’t really process information in a linear fashion,” said Colas. “More information will fool you into thinking you are correct even when you are absolutely wrong.”
More Isn't Always More
To be sure, investors have a difficult enough job these days trying to decipher clues from the Fed on monetary policy, as last month’s no-taper incident demonstrated.
Many investors have grown accustomed to analyzing data like this week’s scrapped construction spending report for the latest clues on growth.
“Disrupting that flow I don’t think enhances the perception of markets or the economy,” said Russell Price, senior economist at Amerprise Financial (NYSE:AMP).
Still, Colas notes there have been a number of studies that have found more information doesn’t necessarily help decision makers.
For example, he cited a classic study that gave horse handicappers varying amounts of information about horses competing in a set of races. The handicappers who received just five pieces of information were actually better at predicting the outcomes than those who were given 40 facts, including the original five. Yet the group with 40 facts was more certain.
“Every study we could find concluded that ‘Information overload’ was only good for adding perceived certainty rather than actual accuracy,” said Colas.
Upon Further Review...
Sam Stovall, chief investment strategist at S&P Capital IQ, said there are “absolutely” times where he’s felt overloaded by a plethora of data.
“You can think more clearly when there’s a lack of noise,” said Stovall. “I think that’s why some people have given up being Fed watchers and have become technicians who look at weekly, not daily, charts. They get confused by all the noise."
It's also worth remembering that government data is frequently revised, proving initial reports completely wrong.
Stovall recalled a 1982 cartoon by Robert Mankoff in the New Yorker that showed a man watching a news anchor on TV who said, “Final, revised government figures for the fourth quarter of 1981 now indicate that the Yankees, not the Dodgers, won the World Series.”