Reed C. Fraasa, CFP®, AIF®, RLP®
"Information is the resolution of uncertainty."
Claude Shannon
When people think of significant scientific breakthroughs that have affected our present world, the top of the list may include Albert Einstein for his theory of relativity that led to the atomic age. Watson and Crick, who visualized and modeled DNA's double helix structure, which led to the genome age, may also be close to the top. But very few people would include Claude Shannon, the father of the information age.
Shannon was a Bell Labs scientist who did research work for the military during World War II on communications between radar and artillery for anti-aircraft targeting.
The military needed its fire-control systems to work directly with radar. If artillery could track an aircraft and predict where it was heading, the accuracy would significantly increase and be more effective. Radar was full of information (noise) that was not necessary for the task, and the communication systems at the time could not separate the noise from valid data.
Years later, Shannon, who was a mathematician, believed the problem of noise in the data had a mathematical solution.
In 1948 he formed his thesis that information is the resolution of uncertainty. In its simplest form, he believed information should resolve uncertainty, and like the flipping of a coin, be reduced to "yes" or "no" answers. His work paved the way for the information age with digital data communicated in a binary system of "0s" or "1s."
His work enabled the world we take for granted today, including all communication systems, smartphones, and anything that uses a computer system (smart device) to process data.
In a previous article I presented the idea that information is not knowledge, and that often, too much information can increase uncertainty. If Shannon's simple theory that information is the resolution of uncertainty is correct, why does research show that for humans, too much financial information can lead to more uncertainty?
Like the radar systems in Shannon's time that were full of too much information or noise to be effective, today we suffer from information overload. However, unlike machines, humans do not think in binary yes-no terms—the science of behavioral finance studies the influence of psychology on the behavior of investors and financial analysts.
Over the last thirty years (a whole generation), the volume of information we are exposed to has grown exponentially, and most of the information is biased and editorialized. Whether it is opining cable news anchors, shocking social media posts, or inflammatory internet blogs, they are all tapping into our brains' dopamine trigger for our pleasure center. The stimuli are no different than the response we produce with food, exercise, love, sex, gambling, and drugs.
Like anything else in life, when it comes to the consumption of information, moderation is the key to achieving wisdom. Try limiting your consumption of cable news, social media, and internet blogs to zero for two weeks. At most, read a newspaper or watch the evening network news or PBS Newshour each day. When you feel anxious or the fear of missing out, take a walk, listen to music, or read a book. It will pass, and nothing will change in the world.
If you feel uncertain about your money or your investment choices, you should not turn to the internet, cable news, or an inflammatory blogger. Instead, try this exercise. Take a piece of paper and write down your concerns or fears. Then, to the right of those, write down what you feel will happen if those concerns or fears come true. Then, to the right of that, write down what you think will happen if those concerns or fears do not materialize.
After two weeks, share your experience with your advisor – we would love to hear from you. Let us know if you tried the exercise and share what you wrote in an email so we can discuss it with you. The path to financial wisdom is not the consumption of more information but the elimination of all the noise.
Author’s Bio
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.