Warning: Do Not Buy Bitcoin When You’re Hungry

Warning: Do Not Buy Bitcoin When You’re Hungry

A new book titled “Noise: A Flaw in Human Judgement,” highlights that the decision-making processes of individuals and organizations are “far less consistent and more variable than we think.” This according to a recent Wall Street Journal article by columnist Jason Zweig who writes, “Every investor needs to take account of that; otherwise, your long-term results will always be hostage to short-term whims and circumstances.”

The book, by Daniel Kahneman, Olivier Sibony and Cass Sunstein, defines noise as “deviations in judgements that should be identical,” Zweig writes. Kahneman describes it as a “statistical phenomenon,” adding, “To see it, you have to make multiple decisions about the same case with the same information, and those situations are very rare.”

Zweig outlines some examples from the book:

  • Doctors are 15 percent more likely to order breast-cancer screening for patients they see first thing in the morning than they are right before lunch.
  • When shown matching descriptions of hypothetical offenses, 208 federal judges differed by an average of more than 3.5 years in the length of the prison sentences they recommended.

While Zweig stipulates that while varying judgements of identical information isn’t new, Kahneman’s book offers a “deeper discussion of where the noise comes from.”

The book discerns between types of noise:

  • Level noise: Persistent deviation from the average opinion across many people.
  • Pattern noise: When individuals deviate from their own typical view. For example, you might tend to be more bullish than average, but also show a pattern of becoming especially enthusiastic whenever a company introduces a new product or “whenever Elon Musk tweets.”
  • Occasion noise: This is driven by “random variations in moods, situation and whatever happens to grab your attention,” the article explains, citing examples such as an investor becoming more risk averse after reading about a natural disaster, or being prone to buying more of a failing asset when feeling angry.

The opposite of noise, says Kahneman, is discipline. “It’s just doing things in a reasoned way, organizing your thinking so it is as intentional as possible.”

Kahneman offers the following ways that investors can tap into discipline versus noise:

  • Use a checklist of questions to be answered “in the same order each time”—he notes that people tend to interpret “later information in ways consistent with whatever you happened to learn first, skewing your final judgement.”
  • Break decisions into components: Rank the factors used to evaluate stocks (i.e., innovation, financial strength, etc.) independently of the others (Kahneman suggests using a numerical scale from 0 to 5) and compare it to industry averages and long-term historical data. In this way, you can keep one good quality from influencing all the others.
  • Get other opinions: Gathering multiple opinions can reduce the noise, says Kahneman, who adds that waiting as long as you can before making a decision and then circling back to your checklist is a good idea.

“In a world full of noise,” Zweig concludes, “discipline is your greatest asset.”