Social Media: The age of information will amplify investors’ biases

Picture credit: Jason Howle

Since the computer’s massification, the way people deal with information has been shifting at a steady pace. If we could go back in time and see how people used information in the 70’s and compare it with the present, we would be astonished with the transformation.

In the beginning, it was the way information was worked, now it is the way the information is spread. Additionally, the volume of information available has accomplished exponential growth, which makes it impossible to keep up without filters.

Computers allowed the collection and processing of much more information. The volume of data has skyrocketed making it impractical to keep up with everything. Something like 3 decades ago, an executive could keep up with the stream of information just by reading two daily newspapers and a handful of specialized publications. Now, everything is everywhere which brings a renewed problem: optimizing the diffusion of information.

As an answer to this problem, we are now seeing the rise of a new type of publishing: online social media. That’s the new way of diffusing content. The problem was the huge the volume of information available making it indigestible. Social media has solved the problem for us through algorithms.

Through the accumulation of huge datasets, algorithms can filter the flow of information. Social media companies have favored user preferences as their default optimization principles. Therefore, social media companies collect data about preferences and bias, and feed you with information that you are more likely to accept.

The main problem with this approach is that reinforces your bias. Social media companies, like Facebook (FB) or even Google (GOOG) will give what you want to read. For investors, this is not a good thing. Investors need to constantly be exposed to the contradictory. However, over time algorithms will have enough data on you to reinforce your own bias.

The bottom-line is: investors need to be careful about the information they collect. If they rely too much on social media and search engines, they might find out in the worst way they’re getting the answers (investment thesis) they want to hear.


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