A video explaining Information Bias by Rolf Dobelli the author of The Art of Thinking Clearly on the IDFC Mutual Fund Youtube Channel.
WHAT IS INFORMATION BIAS AND WHY IF YOU HAVE AN ENEMY, YOU SHOULD GIVE THEM INFORMATION
In his short story ‘Del rigor en la ciencia’, which consists of just a single paragraph, Jorge Luis Borges describes a special country. In this country, the science of cartography is so sophisticated that only the most detailed of maps will do – that is, a map with a scale of 1:1, as large as the country itself. Its citizens soon realise that such a map does not provide any insight, since it merely duplicates what they already know. Borges’ map is an extreme case of the information bias, the delusion that more information guarantees better decisions.
Searching for a hotel in Miami a little while ago, I drew up a shortlist of five good offers. Straight away, one jumped out at me, but I wanted to make sure I had found the best deal and decided to keep researching. I ploughed my way through dozens of customer reviews and blog posts and clicked through countless photos and videos. Two hours later, I could say for sure which the best hotel was: the one I had liked at the start. The mountain of additional information did not lead to a better decision. On the contrary, if time is money, then I might as well have taken up residence at the Four Seasons.
Jonathan Baron from the University of Pennsylvania asked physicians the following question: a patient presents symptoms that indicate with a probability of 80% that he is suffering from disease A. If this is not the case, the patient has either disease X or Y. Each of these diseases is equally bad, and each treatment results in similar side effects. As a doctor, what treatment would you suggest? Logically, you would opt for disease A and recommend the relevant therapy. Now suppose there is a diagnostic test that flashes ‘positive’ when disease X is present, and ‘negative’ when disease Y is detected. However, if the patient really does have disease A, the test results will be positive in 50% of the cases, and negative in the other 50%. Would you recommend conducting the test? Most doctors said yes – even though the results would be irrelevant. Assuming that the test result is positive, the probability of disease A is still much greater than that of disease X. The additional information contributes nothing of value to the decision.
Doctors are not the only professionals with a penchant for surplus information. Managers and investors are almost addicted to it. How often are studies commissioned one after the other, even though the critical facts are readily available? Additional information not only wastes time and money, it can also put you at a disadvantage. Consider this question: which city has more inhabitants – San Diego or San Antonio? Gerd Gigerenzer of the Max Planck Institute in Germany put this question to students in the Universities of Chicago and Munich. Sixty-two per cent of Chicago students guessed right: San Diego has more. But, astonishingly, every single German student answered correctly. The reason: all of them had heard of San Diego, but not necessarily of San Antonio, so they opted for the more familiar city. For the Chicagoans, however, both cities were household names. They had more information and it misled them.
Or, consider the hundreds of thousands of economists – in the service of banks, think tanks, hedge funds and governments – and all the white papers they have published from 2005 to 2007, the vast library of research reports and mathematical models. The formidable reams of comments. The polished PowerPoint presentations. The terabytes of information on Bloomberg and Reuters news services. The bacchanal dance to worship the god of information. It was all hot air. The financial crisis touched down and upended global markets, rendering the countless forecasts and comments worthless.
Forget trying to amass all the data. Do your best to get by with the bare facts. It will help you make better decisions. Superfluous knowledge is worthless, whether you know it or not. Daniel J. Boorstin put it right: ‘The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge.’ And next time you are confronted by a rival, consider killing him – not with kindness but with reams of data and analysis.
The above article is from the book The Art of Thinking Clearly by Rolf Dobelli. The article is only for educational and informative purposes to explain and understand cognitive biases. It is a great book, definitely worth a read!