Information Overload, Decision Paralysis, and Herding

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This post was written by Ken Weingarten and Frank Fernandez of Weingarten Associates

Let’s assume for a moment that your current investment portfolio was all in cash and you had to start from scratch. How would you invest it? What would be your asset allocation (stocks vs. bonds)? Where would you begin to look for help? If you did a simple web search for “How to invest in the stock market” you would be thrown down a rabbit hole of information and an overwhelming amount of choices.

Let’s say you read through the first 10 “Stock Market 101” results from your web search and now even more questions arise. How much do you invest and in what? Stocks? ETFs? Mutual Funds? Are you okay with losing XX% of your portfolio in a severe downturn? How do you invest internationally? What about taxes on your investment income? What’s going on in the economy today? The news just said that this company is down because of quarterly earnings and guidance and other gibberish you might not understand.

The questions seem endless. We could go on and on about what other questions may be running through your mind. Keep in mind, this is just for the equity portion of your portfolio.

Will you invest in bonds? How much? If you do a web search for “How to invest in the bond market” you will be thrown down another similar rabbit hole.

If the amount of questions above seem daunting to consider, that is the point of this post. There are two topics we would like you to consider. From a financial standpoint, minimizing or eliminating them work in our favor: Decision Paralysis & Herding.

Decision Paralysis

The scenario above is meant to convey those feelings of apprehension and uneasiness you have when there are so many choices and so many questions with no answers, or even worse, conflicting answers. It is very easy to become overloaded and simply shut down. In which case you have no investment strategy at all.

Decision paralysis is a behavioral finance concept in which feelings of possible regret and “What if’s” are associated with each and every possible choice. You want to assess each possible consequence to make sure you make the right choice, but as a result you branch off into multiple thought processes. We are not saying that you should just avoid thinking things through and just go with your gut. There are different techniques that can be used to minimize or eliminate this mental hurdle. This concept is not limited to financial decisions, as the range for decision paralysis can emerge in many different situations in life.

Another, less consequential and innocent example of when you may experience this is when you log on to watch a movie with nothing you specifically want to watch in mind. Maybe you sift through the genres to see what’s available and something may pop up that catches your eye. But what if it’s a bad movie? Checking out the “Trending” or What’s hot?” section usually has something good to watch. This is what leads to the next concept: Herding.


Herding is an occurrence that is the result of a choice made under the impression that you made with that choice with your own conclusions and no external influences. However, the opposite is taking place here. Influences, or information, are “discovered” by you and maybe a few others. This can be helpful when you are trying to figure out what movie to watch. In investing you see herding occur frequently and it is not always so helpful.

Returning to the introduction, in the financial press, analysts make claims of buying certain positions because it’s due for a run up in price. You are being sold on the idea of why you should not be an “average” investor and invest in the market indexes which provide “average” returns when you can buy these 2 or 3 “hot” positions that can beat the market. It is somewhat of a paradox as ditching the market “herd” for this analyst’s tips is a herd in and of itself. Someone who follows this sort of information may think “This analyst is onto something and no one seems to be paying too much attention to this. I could get it cheap now before everyone else starts to hear about this”. If you have ever caught yourself thinking something along the lines of this, not just related to finance, it might be time to step back and consider if you are on the verge of falling prey to herding. (Btw, for every smart analyst who thinks their 2-3 stocks are going to be strong in the future, there is another even smarter analyst who disagrees!)

Catching and Fixing These Behaviors

Despite knowing this, we’re all susceptible to Decision Paralysis and Herding. It will happen and it’s okay. It is what makes us human after all. What is important is catching yourself and understanding how much of yourself you are willing to give in to these behaviors.

When it comes to Decision Paralysis, a few tips to remind yourself what to do when it occurs are:

  • Limit yourself to 2 or 3 choices. If you find yourself considering a very large number of options in any decision framework, cut things down to the 2-3 best choices and then make your decision.
  • Setting deadlines. To quote Voltaire, “The Best is the Enemy of the Good.” One should not wait for the stars to align as you can be waiting for quite a while. Telling yourself that you should decide by a certain time can frame how you make a decision.
  • Talk with someone. With so many thoughts circulating in your head, it easy to get lost in there. Getting those thoughts of your head and out in the world can give you some clarity. The value of a financial planner comes into play here as not only do you get to voice your concerns but you can also receive feedback and solutions while avoiding future bouts of decision paralysis.

Here are some common Herding events to consider:

  • Stock Market Bubbles
  • Black Friday “Deals”
  • New smartphone releases
  • Tourist destinations

You should not immediately become a contrarian upon reading this. If the weather calls for rain and everyone has their umbrellas it is probably a good time to follow the herd and grab your umbrella.

What if the market is going gangbusters and it ‘seems’ that everyone is buying stocks? This is an example of when it is NOT a good time to the follow the herd. On the flip side, when the market is going down and it ‘seems’ that everyone is selling, that is another really bad time to follow the herd as that locks in losses. (Remember the old saying: buy low, sell high?)

Simply having someone to talk to like a financial planner can help deal with the issue of decision paralysis and avoid the pitfalls of following the herd. Investing with the herd is often a big mistake. Having a written Investment Policy Statement is critical to keep your head when everyone else is losing theirs!