When Less Is More: Choice Overload And The Benefits Of Focus

7th May '19 by Ben Hobson

14 comments 4421 reads

Whenever I write about behavioural flaws, I usually get to rely on a legion of academic research papers to explain them. This time I’m starting with some first-hand experience.

Over the past several years (perhaps longer) I’ve been dealing with a pretty strange psychological flaw of my own. It’s probably one of many.

For the most part, I’m not troubled by it day-to-day. But at certain moments it freezes me in a wave of indecision. I act bizarrely and ultimately make nonsensical and unsatisfying decisions. I can see (and laugh about) the problem, but it’s not easy to stop it.

It’s all to do with parking my car.

I own a fairly regular family-sized SUV. I guess like many others on the road, I overrate my own driving skills (another flaw). In a busy car park with just one space, for example, I’d back myself to do a great job of parking in it - no matter how tight or awkward it is - and be very happy with the result.

The problem isn’t with packed car parks though, it’s with empty ones.

In an empty car park, with maybe only a few cars around, I become completely stumped about where to park. I drive past space after space - occasionally even driving up to a higher storey - “in search” of somewhere I’d be happy to park. This infuriates my wife and leaves my kids staring at me in bemusement.

I’d like to say that this strange behaviour is down to a rational desire to find the optimum space. Perhaps one nearest to the ticket machine? Or nearest to the exit? Or away from where other people might park next to me? But I’m not sure it is. And when I do finally settle on a space, I’m never really that happy with the choice.

It all seems a bit ridiculous. When I mention this to family, friends and random acquaintances, the replies range from sympathy to confusion. But every so often I also get nods of empathy. It seems I’m not alone with this parking thing.

But there’s more to this than just empty car parks...

A tyranny of choice

Twenty years ago, two psychologists - Sheena Iyengar and Mark Lepper - did a study involving jam. For conserve aficionados, the jam they used was the Royal Warrant holding British brand,…

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iwright7

7th May '19

Ben,

....A better route might be to work-up a strategy and use pre-prepared checklists and screens to help guide buying decisions instead.

I could not agree more with greatly narrowing down the field. Buffett's advice comes to mind... "Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever.”

The trick is identifying great businesses, with great management. High ROIC%/ROE% with high Quality scores help greatly in this regard.

whitmad

I'd add to this the danger of bias resulting from effort expended in research. I found myself at one point tending to favour those stocks that I had investigated in more detail, findng reasons to overlook the flaws and weaknesses. I guess this is related to loss aversion, not wanting to waste the effort made. I now use a more systematic screen and rules based approach. I recall a point Nicholas Taleb made in his Black Swan book, that beyond a certain level of basic research, investment performance does not improve with more detailed investigation.

Gromley

I very much concur whitmad, in fact I'd go further and say that there is a tendency not only to overlook the flaws and the weaknesses, but in fact find ways to justify them or to argue that 'in the wider scheme' of things they are not so important.

If you're not the one who is "intellectually invested" in a given stock it's not hard to see those behaviours in others (I see them often even from posters on Stockopedia).

There's a chap called Ed Croft who also makes the point, on occasions, that analysing too much data is not necessarily a good thing.

For my part, having spotted these weaknesses in myself I tend to invest in a wider number of stocks and not have any "big conviction plays".

But also, I think, I'm becoming more adept at mentally filing away research that uncovers a weakness or risk for further review if and when that goes away or gets disproven. There's still a risk of course that what I will really be doing is looking for future announcements to give me an excuse to disregard concerns but I hope that I am avoiding that.

Nick Ray

Apparently they ran that jam taste test with a group of twenty micro-cap CEOs.

And they unanimously agreed that the flavour they liked best was "jam tomorrow".

8th May '19

In relation to screens and checklists I have found that my returns have improved greatly since taking a couple of hours hour to run through a company's financial ratios and background information, before hitting the Buy button. For a Checklist I have a standard Word form I complete mostly from information available in Stockopedia. My "Targets" are a mix of Value, Quality and Momentum ratios some of which (i.e. the need for double digit Return ratios in bold) are particularly important in my process. Metrics that "pass" my targets are filled in Black and those that fail are in Red. Too many Red numbers = Move on.

To try to reduce confirmation bias I cut and paste relevant company commentary (RNS summary Results Outlook/Paul/Graham/Blogs/IC) grouped by month (recent months 1st) and highlight in Black Bold particularly strong positive information and in Red Bold relevant negative information. I then score the total company information out of 10 (<7.5 is move on, >8.5 is likely a high weight buy).

I make a summary note of what I like/don't like if I decide to buy and do the same if/when I decide to sell. So I have a working document which is both quantitative and qualitative, which I can update when more news becomes available and I can refer back to at any time.

The net effect is to whittle 2000+ UK companies to a possible investable universe of no more than about 100, of which 20-30 make it into my portfolio. For anyone interested the numerical part of my Checklist is below....

Howard Adams

Hi Ian

Very useful posting and checklist, thank you.

Regards
Howard

andrea34

I would perhaps argue with a theory that, in principle, having 2600 stocks to choose from makes it easy to pick good stocks because one could then use the flimsiest excuse to exclude a stock from one's portfolio. I'm not sure how this works in practise though......

tom_chappell

9th May '19

Very useful, thanks!

timk

Read Girgerenzer, fits nicely

That is pretty much the way my strategy has evolved. Run a screen, then do a minimum of additional research to look for red flags.

A_Private_Investor

iwright?Thanks for this checklist. I understand moats, but can you give a bit more information on "Magic (moat)" ">80" entry, even if it is just a link. Thanks.

bobsandy12

Familiar with the dilemma so, that=nks for the article and also posts

10th May '19

PI - Magic (Moat) is my abbreviation for Greenblat's Magic Formula Ranking (with Moat added to remind me). The reason is that the Magic Formula tends to find cheap companies with a decent ROC, (which may have a Competitive Advantage or Moat). I plumped for Magic Formula >80 as a Pass because this gives me the Top 20% of the market by ranking.

I should add that in itself the Magic Formula >80% is not an entry point, but rather another metric that gives me confidence, that the company is offering Quality and Value if most of the other Checklist metrics pass and the newsflow is positive. Trust this helps.

matylda

Ben,

Thanks for the article.

I wrote one recently on how I get from 2,000+ UK stocks down to a much more manageable 325, 15% of the original number available to me to invest in.

I did this using a simple Stockopedia screen - Here is the link.

I call the remaining list "Companies In My Universe" and I suggest everyone would benefit from having a more focused list.

Hope it's useful.

When less is more: choice overload and the benefits of focus

A tyranny of choice

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Ben Hobson

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