The pandemic has made way for the concurrent burgeoning of the infodemic. And this infodemic is more severe at times. Infodemic usually means excessive, irrelevant, unreliable information that spreads rapidly.

Investor’s attention to information is an essential factor in learning and decision-making processes. Limited cognitive resources hinder human thinking capacity and lead to continuous tension among the multiple information channels competing for limited mental resources.

Limited attention acts as a critical source of friction in financial markets.  In this infodemic, it becomes challenging for an investor to process the information rationally and make decisions (as we expect in theory). Thus, challenging the foundations of the established economic and financial theory, rationality in the decision making.

For the traditional models to work, investors must update his/her belief accurately on receiving new information.  Investor’s inattention to the relevant news may result in underreaction. For instance, the frog-in-the-pan hypothesis states that investors under-react when small amounts of information arrive in the market relative to large quantities of information arrival.

Focusing on these cognitive and emotional aspects helps in investigating actual financial behavior and is vital for success. An important question to be asked is – Whether the popular news is relevant news or not. Is it just the media attention driving investment decisions? Is the return on any investment asset the result of new information being conveyed?

One strand of theoretical literature also explores the no-media premium. With less visibility and less media coverage, neglected stocks often earn more than the recognized stocks to compensate their investors for being imperfectly diversified.

It is easy to gauge investors’ attention by looking at the google search volumes and trends. Investors exhibit ‘limited attention’ behavior, and financial intermediaries predict this behavior and exploit it.

More often than not, familiarity bias is at play. Even if international investing options (with noticeable diversification gains) are available, the investors prefer ‘familiar’ investments of their own country, region, state, or company.

With an influx of information and misinformation, the Gambler’s Fallacy plays out, where investors see patterns where none exist.

So dear investors, you may follow the following tips for surviving this pandemic as well as the infodemic (which may be more damaging than the pandemic itself, causing panic)  that is all around us:

• Do not spend too much time on social media, and do not believe in any unverified information.

• Keep up with the basics and know that common sense trumps everything else. There is no secret known only to the lucky few privileged ones hiding it from the rest of us.

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• Being hyper-focus on a specific investment class or security within narrow frames is not the best way to make financial decisions.

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• Please do not violate the principle of fungibility when it comes to money. To say money is fungible means that all money is the same regardless of its origins or intended use.

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• Beware of mental accounting – treating money obtained from salary and capital gain differently is illogical.

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• Do not forget the Stock Dale Paradox: Balance the realism (Get vaccinated) and optimism (This too shall pass). The simplest explanation of this paradox is hoping for the best and acknowledging and preparing for the worst.

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Your attention is valuable – spend it wisely!

Best Regards

 
Dr. Tarunika Jain Agarwal Ph.D.

Alpha Research