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Strongbox CapitalAsset Allocation & Investment Strategien1 MIN READING TIME2019-01-07

The Biggest Mistakes, Part 4: Why it matters to the order of information

Would you have known? The first-mentioned information usually exerts a significantly greater influence on the behavior than is the case with subsequent information.

The human ability to concentrate is not constantly the same, but decreases over time. As a result, the information transmitted first in an information series is perceived more strongly than the subsequent ones. Science speaks here of the so-called primate effect.

The message

"The BAYER company posted record sales in the fourth quarter, but growth in the foreign business was lower than expected"

is received more positively by investors than the message with the same content, but in a different order:

"Growth in the foreign business was lower than expected, yet the BAYER company achieved record sales in the fourth quarter."

While record sales are more strongly perceived in the first announcement, many investors are likely to remember the weakness in international business and influence behavior accordingly.

Irrational investment decisions

The primate effect thus means that the order of the displayed information affects its processing. Subsequent information is thus superimposed on the meaning of the information transmitted first. And irrational investment decisions result from the influenced information processing.

In addition to the primate effect, humans are also subject to the so-called priming effect. This states that later perceived information will be influenced by the first mentioned information. At least as long as they are in the same context.

The context effect, which describes the primate and the priming effect, influences us accordingly in our information processing. While helping us master the complexity of our environment, it also keeps us from rationally processing information. We should therefore leave important decisions, such as investment decisions, to rule-based models. These process information without distortion: unlike us.

 

Part 1 of the series:

The biggest mistakes of investors, Part 1: Why investors often fool themselves

Part 2 of the series:

The biggest investor error, Part 2: The cause of control and illusion

Part 3 of the series:

The biggest investor mistakes, Part 3: Driven by your own self-esteem

 

Strongbox Capital develops rule-based investment strategies based on behavioral finance research. The company was founded in 2016 as an independent and innovative asset management boutique in Zurich. Clients include pension funds, insurance companies, family offices and independent asset managers. Long-term capital preservation is at the center of investment strategies.