The Pitfalls of Too Much Information

In our age of quick online access to company information via Google searches, SEC documents, analyst reports, financial news portals and message boards, is it possible that we have too much data on which to make a valid investment decision?

The thought occurred to me this week as I was bombarded by complaints from investors sympathetic to camera phone chipmaker OmniVision Technologies (OVTI - commentary - Cramer's Take), which has fallen a bunch this week after issuing poor guidance for the current quarter. The OmniVision bulls manage to summon up a vast range of positive information to supply skeptics, such as myself, with the data points attesting to the value of their company. But when they are in turn supplied with information that doesn't fit their point of view, they dismiss it out of hand.

The issue of how we analyze information as investors is a fascinating one, yet rarely considered. One of the best studies that I have seen on the subject was focused on how Central Intelligence Agency analysts process information; its lessons are fully adaptable to the investment world.

Titled "Do you Really Need More Information?" the essay was written by Richards J. Heuer Jr. and included in a book published in 1997 called Inside CIA's Private World: Declassified Articles from the Agency's Internal Journal. It was first called to my attention by Jim Williams of the Williams Inference Center. In the study, Heuer notes that it is in the nature of human perception to resist change.

"Information that is consistent with our existing mind-set is perceived and processed easily," he writes. "However, since our mind strives instinctively for consistency, information that is inconsistent with our existing mental image tends to be overlooked, perceived in a distorted manner or rationalized to fit existing assumptions and beliefs."

In other words, new information tends to be interpreted in a way that only reinforces what you already think.

Paradoxically, Heuer also writes that once an experienced analyst has the minimum information necessary to make an informed judgment, "obtaining additional information generally does not improve the accuracy of his estimates."

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Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. He also writes a weekly column for CNBC on MSN Money. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at [e-mail].