Financial info surge leading to ‘truth decay’: AMP

Truth decay, as analysed by a RAND Corporation report, is characterised by: disagreement about facts and their analytical interpretation; a blurring between fact and opinion; an increase in the volume and influence of opinion and personal experience over fact; and declining trust in traditional sources of facts such as government and newspapers.

It’s evident in: declining support for getting children vaccinated despite medical evidence supporting it; perceptions crime has increased when it’s actually declined; and a lack of respect for scientific evidence around global warming.

Elements of truth decay were evident in past periods like the 1960s and 1970s, but increasing disagreement about facts makes the current period different.

The causes of truth decay include:

• behavioural biases that leave people susceptible to information and opinion that confirms their views and aligns with their personal experience;
• the information revolution and social media that have led to a surge in the availability of information and opinion and the rise of partisan news channels;
• educational systems that have not taught us to be critical thinkers;
• social polarisation with rising inequality and division attracting people to opposing sides that are reinforced by participating in social media echo chambers.

The consequences include a deterioration in civil debate as people simply can’t agree on the facts, political paralysis, disengagement from societies’ institutions and uncertainty.

Why is truth decay relevant for investors?

Truth decay is relevant for investors because:

• it could lead to less favourable economic policy decisions which could weigh on investment returns; and
• investors are subject to the same forces driving truth decay such that it explains why the worry list for investors seems more worrying and distracting.

The first is a topic for another day, but in terms of the heightened worry list facing investors there are three key drivers.

First, just as with the broader concept of Truth Decay various behavioural biases leave investors vulnerable in the way they process information.

In particular, they can be biased to information and particularly opinions that confirm their own views. People are also known to suffer from a behavioural trait known as “loss aversion" in that a loss in financial wealth is felt much more distastefully than the beneficial impact of the same sized gain.

This likely owes to evolution which has led to much more space in the human brain devoted to threat than reward.

As a result, we are more predisposed to bad news stories that alert us to threat as opposed to good news stories.

In other words, bad news and doom and gloom find a more ready market than good news or balanced commentary as it appeals to our instinct to look for risks. Hence the old saying “bad news sells”.

Secondly, thanks to the information revolution we are now exposed to more information than ever on both how our investments are going and everything around them. This has particularly been the case since the GFC – the first iPhone was only released in 2007! In some ways this is great as we can check facts and analyse things very easily.

But the downside is that we have no way of assessing all the extra information and less time to do so. So, it can become noise at best, distracting at worst. If we don’t have a process to filter it and focus on what matters we can simply suffer from information overload.

This can be bad for investors as when faced with too much information we can become more uncertain, freeze up and make the wrong investment decisions as our natural “loss aversion” combines with what is called the “recency bias” that sees people give more weight to recent events which can see investors project bad news into the future and so sell after a fall.

But the explosion in digital/social media means we are bombarded with economic and financial news and opinions with 24/7 coverage by multiple web sites, subscription services, finance updates, TV channels, social media feeds, etc.

And in competing for your attention, bad news and gloom trumps good news and balanced commentary as “bad news sells.” And the more entertaining it is the more attention it gets, which means less focus on balanced quality analysis.

An outworking of all this is that the bad news seems “badder” and the worries more worrying. Google the words “the coming financial crisis” and you get 115 million search results with titles such as:

• “a vicious Fed-fuelled economic crisis is coming”;
• “coming financial crisis: a look behind the wizard’s curtain”;
• “here comes another global financial crisis”;
• “coming financial crisis will be much worse than Great Depression”;
• “another financial crisis is imminent, four reasons why”; and
• “Japanese whales and the next financial crisis” – I knew there was a connection!

In the pre-social media/pre-internet days it was much harder for ordinary investors to be exposed to such disaster stories on a regular basis. The obvious concern is that the combination of a massive ramp up in information and opinion combined with our natural inclination to zoom in on negative news is making us worse investors: more distracted, fearful, reactive and short-term focussed and less reflective and long-term focused.

Shane Oliver, head of investment strategy and chief economist, AMP Capital

Financial info surge leading to ‘truth decay’: AMP

Shane Oliver

Last Updated: 28 September 2018 Published: 01 October 2018