Trying to keep up with all of the information and news generated every day is a daunting task. There may not be enough hours in the day to even assess all the analysis that is generated let alone doing independent research. There are many questions that should be asked to determine how to allocate time reviewing information.
How many analysts should be followed? How many strategists should be read? How much time should be spent reading news? What if important news is missed? What if what news highlighted or studied proves inconsequential? These relevant questions which impact our knowledge or ignorance will affect performance. Some information will be used and while other information is going to be discarded or ignored.
Some information or news is more important than others. If it is repetitive, it can be measured, tracked , weighed, and followed, but a lot of news is new and infrequent. Allocating time and effort should be spent on unique information which can often be more impactful because it is a surprise, yet the majority may just be noise. The cost of being informed or ignorant is important.
For example, time spent on knowledge acquisition has been an ongoing area of voter study. The impact of a single vote may be small versus the effort to become informed. This cost is a reason for why voters show "rational ignorance". Voters may remain ignorant or uninformed because the cost of being informed may outweigh the impact of their vote. The cost of being wrong or right may be much greater for an investor, but the calculus of deciding whether to be better informed or stay ignorant is still an important decision.
Classic economic orthodoxy states that an investor will conduct a cost/benefit analysis with respect to the acquisition of information, yet this does not answer the question of how rationally ignorant or informed an investor should be when faced with uncertain information and outcomes. There needs to be tools to fight the effects of ignorance and help focus attention.
So how do investors fight ignorance or engage in successful rational ignorance? We know that trying to learn everything will not work. The simplest solution is to invest passively and hold the market portfolio. This will allow an investor to receive the market risk premium without having to acquire information. A perhaps better solution is to not acquire information but measure the impact of new information in the market through trends.
Trends serve as a signal of impact of information. Trends are the aggregate effect of the action of investors from their assessment of information. There is the assumption that others are information gathers, but the basic premise is simple. Use trends as a highlight for new information activity. If there is no new information, there should be limited trends. If there is a trend, it signals there is information activity that is worth our attention and focus.
For some, the trend identification is enough information to act. There is no need to find the primal information. For others this serves as a catalyst for further inspection. By definition you will be late to market response to information, but it provides a low cost method for sorting through large sets of data. Trend-following can break the cost of information ignorance.
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