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Monday, June 2, 2014

Does Data and Our Personalities Impact How We Invest?




Data is used to understand the environment and make investment decisions about new products and services that directly impact the stock market. Recently, the Institute of Supply Management made an accidental miscalculation on the May Purchasing Manufacturers' Index by published 53.2 and then revising that estimate to 56 after the error was discovered (Strumpf, 2014). Due to the importance of that economic indicator stocks bounced downward and then leaped upwards 26 points after the revision.  The change made sense with investors who saw a tough winter and potential spring rebound. 

Stocks can be finicky on new data. The information provided from credible sources, often released from large institutions, are given more weight than smaller publishers. This doesn’t change the fact that they are still a single reference point that when taken in isolation can lead to inaccurate perception. A single switch of a number, miscalculation, or ignored measurement can change the results dramatically. A small mistake can have much wider market implications.

Market over reaction to news is not something new. For example, press releases of companies hiring consulting firms and making other strategic decisions can have an impact on stocks (Bergh & Gibbons, 2011). News naturally impacts how investors perceive the environment according to their strategies and learned problem solving matrix. This phonomenon is experience when government policy releases create a positive or negative reaction on the market. 

Hyper active stock trading lies in the personalities of the investors and their investment strategies. Naturally investors who seek quick returns are likely to be more reactive to new information in an attempt to gain quickly or avoid loss. You can see this in the activities of day traders who take short gains and long-term investors who wait out the market. Each uses strategies derived from their personalities.

The phenomenon of impulsive reaction or reflective contemplation has been experienced in a number of different experiments. A study by Ledzinska, et. al. (2014) found that the time it took for participants to read instructions in a computer task and formulate a search strategy was related to their reflection-impulsivity diagnosis (R-I). The study highlights how some personalities brush the surface information and others contemplate the deeper meaning of that information.

In the investment world data is extremely important for decision making. When data is drawn from multiple sources it is generally stronger and more accurate than when derived from a single source. Savvy investors seek both breadth and depth in their information. The totality of the information allows large investors to make more accurate determinations of stock choices. Width is seen as using multiple markets and depth moves into the logic behind the calculations. Having knowledge of major market trends and how the individual data pieces are calculated helps to avoid rash decision-making when erroneous information is accidentally presented.

Ledzinska, M., et. al. (2014). Cognitive styles could be implicitly assess in the internet environment: reflection-impulsivity is manifested in individual manner of search for information. Journal of Baltic Science Education, 13 (1). 

Bergh, D. & Gibbons, P. (2011). The stock market reaction to the hiring of management consultants: a signaling theory approach. Journal of Management Studies, 48 (3). 

Strumpf, D. (June, 2014). Stocks End Up Despite Jolt From Erroneous Economic Data. The Wall Street Journal. Retrieved August 2nd, 2014 from http://online.wsj.com/article/BT-CO-20140602-711023.html

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