Finance & Accounting

Know When to Stop Digging!

Why do we continue gathering so much superfluous information before we feel comfortable making a decision?

Mei Wang - May  12, 2022

You cannot reach a sound decision without first doing a little research and collecting as much information as is useful. Whether you are a student hunting for a new laptop or Elon Musk on the precipice of closing a multi-billion-dollar deal, the process remains fundamentally the same. But information acquisition can be costly, and it’s important to know when enough is enough. Previous research has determined that people, on average, tend to collect far too much information, and a new study from WHU – Otto Beisheim School of Management explores the reasons behind this phenomenon.

We cannot collect information without first making an investment, whether that be in the form of time or money. For example, you may need to pay for an expensive detailed analysis performed by a research expert, or, conversely, block out time from your own schedule to wade through all the resources yourself. For this reason, it is absolutely imperative that we know when it is time to stop and revaluate. But this is easier said than done, and it can be remarkably difficult to strike the right balance: If you stop too early, you run the risk of being ill informed and making suboptimal decisions. Conversely, if you stop too late, you will have needlessly wasted your time, energy, and resources.

Psychologists have extensively studied the ways people make decisions and have found that most people do indeed tend to collect too much information. Before ultimately settling on a decision, they act timidly, err on the side of caution, and even overspend to access information that is not particularly useful to them. Why might that be? To get to the heart of the matter, we conducted an experiment.

Why we tend to go overboard

There are a couple potential reasons why people tend to collect more information than is necessary. For starters, they could be too risk averse, i.e., they agonize over making the right decisions and continue collecting information to minimize the risk of a potential misstep—even doing so is costly. Curiosity also plays a significant role here, as some people simply desire to know as much as they can about the topic in question, regardless of whether the knowledge is helpful or ultimately extraneous. After conducting an experiment in which we asked 96 subjects to make a decision in a hypothetical investment scenario, we uncovered the surprising chief catalyst behind over-purchasing of information.

Participants in the experiment were given two options: They could base their decision solely on known information; or they could purchase additional information before making a judgment. Both sets of information contained known validity. The experiment was designed in a way that allowed us to survey and make sense of the different possible explanations for over-purchasing, and we have found that people tend to be overly optimistic about the quality of the additional information they procure. Notably, neither risk aversion nor optimism nor curiosity could explain the effect to a significant degree. Instead, people collect too much information because they falsely believe that extra data will be the key to reaching a sound decision—even if this is unlikely or, at times, impossible. Overoptimism is dangerous, as it reflects a certain overconfidence that can strip away our ability to make a sound decision.

Keeping a level head

On average, humans struggle with probability and uncertainty and often get lulled into a sense of false security after landing on an entangled web of complicated math. For example, if we know that one expert has told us that Investment A stands a 70% chance of success, we may feel safer opting for a second investment where two expert opinions agree there is a 60% chance of success. But is that perceived known element leading us to make the right choice? Surprisingly, no! Even if multiple experts agree on the second investment, the first investment remains the better option. Is there is one thing to take away from the experiment, it is that rationally should be the focus when it comes to the decision-making process. In the end, overthinking, over-researching, and over-analyzing will get us nowhere.

 

Tips for practitioners
  • Don’t let the math steer you astray! Think rationally about how much information you actually need to make a proper decision. There is a limit.
  • As a manager or project leader, remember that data collection can be a time-intensive and/or costly process and it can do more harm than good.
  • While there are many factors that affect our decision-making process, bear in mind that overconfidence in additional information is our true Achilles heel.
Literature reference and methodology

96 undergraduate students from the University of Zurich were asked to make a decision based on sets of valid information. The research team tasked themselves with figuring out whether people, on average, seek out more information than is necessary based on several factors, including risk aversion, uncertainty, overoptimism, and curiosity. The results were eventually summarized and published in the Journal of Economic Psychology.

Author

Professor Mei Wang

Professor Mei Wang is an expert on behavioral and cultural finance at WHU – Otto Beisheim School of Management. Her studies focus on the impacts of culture on individual preferences, decisions, and markets.

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