Reaction and misreaction to information

Efficient and inefficient reaction to events

When facing a new information, human reactions might or not be
adapted to the new situation.

A wrong understanding, and / or various other mental and behavioral
biases, could cause a counterproductive reaction.

Rather often, deciders follow a three phase process:
Under-reaction => Adjustment => Overreaction.
By the way, have all information and signals the same value?

 signalFrom lazy reaction
to rushed or amateurish reflex

When a new piece of information or an event that signals (or seems to
 signal) a decisive change of the state of affairs strikes, it should
normally entail an adequate
reaction reaction.

It seems preferable, whenever possible, that this reaction proceeds
from a conscious and elaborate analysis and
decision decision.
You might wonder why such platitudes as a start.
Well, folks, the breaking news is that, however obvious it is,
this is not always what people do
, far from it.

* Sometimes there is no reaction (indifference, business as usual),
* Sometimes also the reaction is a pure reflex, or it results
   from a shallow reasoning (heuristic).

So, let us see how and why.
How people react: 
the diverse, even opposite, ways

Checked the direction?
Checked the speed?


When facing a "stimulus", usually a piece of information
a decider can
react in different fashions
:

* The information / event can be rightly or wrongly interpreted,

Then the reaction is probably maladapted, even counterproductive.

This happens because various
mental biases might interfere.
See the
related article for a fascinating tour of those neuronal bugs.

* It can also bring a reaction that is,

- either too slow, too moderate and insufficient, an "under-
   reaction"
see below "chain of reactions",

- or on the contrary too fast and excessive an "over-reaction"
   (see "
automaticity bias").

=>
Both phenomena, snail reaction and pitbull reaction, can distort
       
decisions and lead to unfit - and sometimes disastrous -
        behaviors (misreactions).

Another important aspect is that people, to start an action, do not need
always an external stimulus
.
Behaviors result also from inner motives, drives, emotions, intentions,
goals, compulsions,...
We carry our own batteries !

Chain of reactions

Often, a chain (or cycle) of reactions takes place as a three phases process:

1)
Under-reaction at the start
,
Often people do not adapt immediately to the new situation because:
  • Either they don't pay attention to the new information.
They might be not watchful enough.
Also the current mass of information can easily flood and
saturate the mind
(cognitive overload)
  • Or they drag their feet as they stay prisoners
of their old beliefs, sentiments and habits.

The
biases to look at, so as to understand that freeze frozen phase, are

- "cognitive dissonance"
(ignoring or rejecting what contradicts
    one's
beliefs, something that is felt unpleasant),

- also "resistance to chan
ge", "mental anchoring", "delaying tactic"
- and even 
sleep  mental or physical laziness...

2)
Gradual adjustment to the new situation
This phase of gradual gradual mental connection with reality takes
place when a further string of information confirms that things  have 
really changed.

3)
Overreaction
This is the last phase when people, stricken with various pleasant or painful
strong emotions such as fear, greed, mimicry and others, start to
run rush madly (exuberance or panic) and overreach the adjustment.

The case in sous investing

Sleeping investors or madly rushing investors?

A typical example of those phenomena is how investors react to economic /
financial
information.
Here the reaction chain / curve already described above:
Under-reaction => Adjustment => Overreaction
is one of the factors that feed market trends and cycles

Some "feedback spiral loop / spiral " between investors might also be
at work in that process. In that case :

- a price rise attracts more price rises
- and a price fall more price falls.

There is a time when wise investors have better stop riding that loop!

A side aspect: the signalsignal conundrum

Ihe "cognitive overload" and the "division of
attention"
tend to strike and destabilize our thinking
when facing the massive "newsflow" which is a
trait of our overcomplex and mediatized world!

Not easy, thus, to judge how relevant / telltale an information
or signal is,
so as to take it or not into account in decisions.
  • Some "strong" signal might be irrelevant.
  • Some "weak" signal might be relevant.
  • Some "noises" might give the illusion of being signals.
  • Some lacks of signal might be signals!
  • And what about buzz and viral information:
where to put the cursor between truth and rumor / manipulation?
=> Better be attentive but selective !

Reference and further readings

From the Behavioral finance glossary
and more specifically its
reaction and information articles

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M.a.j. / updated : 09 Aug. 2015
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