Information Bias - Meaning, Examples, Causes & How to Avoid Information Bias

A well-known proverb states, “Too many cooks spoil the broth”. And in our present times, characterised by a relentless stream of data and information, you could say that too much information may spoilthe decision-making process. With so much data overwhelming individuals and making the analysis process daunting, biases are bound to take shape, and errors can also creep in.

This article looks at one such bias that can hamper your thinking in daily life and while planning your portfolio, whether you are investing in equities or mutual funds . It is called information bias, but there are ways in which you can avoid it.

What is Information Bias?

Information bias occurs when data or information collection has been done erroneously in such a way that it alters the underlying reality. This can occur due to honest mistakes or errors or due to deliberate distortion. Either way, the inaccuracy of data can negatively affect decision-making.

Understanding Information Bias in Investing

Information bias can be a deterrent factor when investing, too. Today, there’s no shortage of information. The proliferation of social media platforms, television channels, and internet websites means that access to various data and information has also significantly risen. But is all data relevant? More likely not, so it’s crucial to know how to pick the most relevant information when choosing your investments or planning your portfolio. For instance, stock prices of individual companies are available every day, or if you have invested in mutual funds, you have access to the net asset value (NAV) daily too. But if you are a long-term investor who aimsto build a healthy portfolio over the years, this type of daily information is irrelevant. Relying on daily fluctuation in stock prices is not recommended if the company's underlying fundamentals remain solid. Similarly, if you have invested in mutual funds, the daily NAV or the fund manager buying and selling stocks from the mutual fund scheme may only be relevant if the scheme's objectives are met.

Additional Read: What are Investing Biases?

What causes information bias?

Information bias is caused by a variety of factors, some of which are listed below:

Confirmation bias: It showspeople’s tendency to find data that aligns with or supports pre-existing beliefs. In an ideal situation, you must gather and evaluate information and then form an opinion. Still, confirmation bias occurs when a person has already formed an opinion and proceeds to pick out information that supports his views. This often leads to erroneous conclusions.

Recency bias: This is reflected as a tendency in individuals to pick out the most recent data assuming it to be more accurate than older data which may not necessarily be the case. It is also led by the misguided belief that the chances of recent events occurring again are higher than older events.

Recall bias: This occurs when individuals can recollect specific data points or events better than others.

Information bias examples

Here are some information bias examples to help understand the concept better.

Confirmation bias: If you have leftist political views, you will seek out only that information that will align with your political opinions. More often than not, you will perceive any other data or information to be inaccurate.

Recall bias: Supposing you are scheduled for surgery, and the doctor asks you to disclose your entire medical history, chances are that you might not recollect all of the diseases you experienced earlier in your life. If you are aged 70, have to undergo a heart operation, and also suffer from diabetes which was probably diagnosed in your 40s, you might not recollect this particular piece of information.

Recency bias: Assume you are an analyst who has to estimate the profit growth of a particular company in the next three years. If the last financial data shows the company to have reported a fall in sales and profits, then you might erroneously assume that this trend will replicate in the next three years. This is recency bias, where you presume one tough year to become the default when history shows a different picture.

How to Avoid Information Bias?

These are some steps to follow if you want to avoid information bias.

Reduce exposure to news channels and social media: The flow of information on business news channels and even social media platforms tends to be relentless. Perhaps it’s a good idea to reduce your daily exposure to these sources. Focus more on selecting trustworthy sources that provide reliable information.

Rational decision-making: Your investment decisions need to be made with a rational frame of mind that involves objective analysis of the data at your hand. If you have a process in place that has been chalked out to meet your financial objectives, focus only on the information that is relevant to this process. Don’t let all kinds of information sway you.

Diversify your sources: Diversifying your investments is often recommended when building your portfolio, but diversification is a good strategy even when accessing information. Don’t rely entirely on one or two sources. Instead, try building a network of reliable sources that includes views you agree with and those you disagree with. This can help give a more balanced approach to your investment process.

Enlist professional advice: If you think that it’s too much of a hassle to sift through the information available to you and separate the relevant from the irrelevant, you can always consider enlisting the help of a financial advisor who can guide you in making the suitable investments and building your portfolio.

Additional Read: What is Financial Planning?