Overview – Beware the Dangers of Analysis Paralysis
Beyond investing, when was the last time you were tasked with making a decision which needed to be supported from a given set of facts and data?
Such a decision can be as major as selecting which university to attend, or even something as trivial as deciding which item to select on a takeout menu.
When it comes to making decisions like these, the procedure most people follow is to first analyze the relevant data, weigh different options given the data they have just analyzed, then finally make a decision. However, it’s not unheard of for people to be overwhelmed with their vast array of choices and end up making a poor decision or make no decision at all.
The inability to decide because of the overwhelming number of factors to consider has a name: analysis paralysis. Because investors are tasked with making so many decisions, it’s entirely possible for investors to find themselves falling victim to this as well.
What is “Analysis Paralysis”?
Put simply, analysis paralysis is when an individual or institution attempts to make a decision but ends up overanalyzing the data and/or overthinking the problem at hand, preventing them from forming a decision. Those who fall victim to analysis paralysis may struggle to decide because they fear that their decision may lead to even more problems, or that the decision they make has to be perfect.
For example, imagine you are given the task of ordering dinner for your family. You’re told that you have total freedom in deciding which place to order from and what food to order.
After being inundated with a wide variety of different choices and things to consider, a flurry of questions and hypothetical scenarios start to appear in your head.
“What if my family doesn’t like this?”, “What if my siblings like the main dish but my parents don’t?”, “If there’s no delivery option, will I be able to pick up the food on time?”: As more questions and hypothetical scenarios start to appear in your mind, it becomes increasingly harder to make a decision.
Analysis paralysis has been discussed and studied in-depth over the years, and as a result, there exists an abundance of articles, videos, and other forms of content that discuss the different ways to combat it.
Because analysis paralysis occurs whenever people are tasked with making a decision, it has the ability to affect virtually everyone. Naturally, investors are one of the groups of people who are affected by it as well.
Analysis Paralysis & Investing
Investors make all sorts of decisions, both large and small, very frequently. These decisions can range anywhere from deciding which sections of the news to read all the way to deciding which industry or company to analyze next.
Because we live in the Information Age, we are constantly being flooded with information. Some of this information is useful, some of it is utter garbage – the onus rests on investors to filter out the good from the bad.
It can be argued that almost all the work investors do, such as personal study, poring over annual reports, and performing investment analysis, ultimately leads to an investment decision that needs to be made.
Decision-making forms the backbone of investing. Remember, the one who makes the final decision is you – it’s fine to seek the counsel of advisors, friends, and other investors, but the decision-making authority rests solely on your shoulders.
Of course, not all decisions are equal – some require only a modicum of thought, whereas others may require lots of discussion and evaluation before a decision can be reached. Some decisions can be made right away, while some may take weeks to decide.
The last thing an investor wants is to make no decision at all. It’s better to take your time deciding than to give up entirely. I’ve experienced analysis paralysis before, both in my personal life and in a few instances as an investor. Therefore, I will share some of the methods I use to try and avoid analysis paralysis:
Some Practical Ways to Avoid Analysis Paralysis
Establish Clearly Defined Parameters/Boundaries
Whenever I’ve made major decisions in the past, I’ve noticed that reaching a decision becomes much easier when there are clearly defined parameters/boundaries that I need to adhere to.
Failure to establish any sort of limits means there are, theoretically speaking, infinite possibilities to choose from. Obviously, no one has the time, energy, or capacity to evaluate every possible choice – attempting to do so can quickly result in analysis paralysis.
By imposing well-defined boundaries, you greatly narrow down the list of possibilities you need to evaluate, and as a result, can focus your time and energy on just a handful of possibilities. Evaluating five options is much easier than trying to evaluate hundreds.
Earlier, I brought up the example of ordering dinner for your family. You are told that you have the freedom to choose where and what to order, but this can quickly overwhelm you because this means you have a seemingly infinite number of options to choose from.
If you restrict your search to Japanese food, and further restrict it to sushi, then you’ve just eliminated hundreds of other options that you might have previously considered. You could restrict it even further by imposing a budget, say $50, and searching only for restaurants within 15 km from your home.
Now, you have a very narrow range to work with: you need to look for Japanese restaurants within 15 km that offer sushi such that your total order will be less than $50. This is much easier to work with than “buy whatever you want.”
Say that you’re looking to make investments in the oil and gas industry, but don’t know where to start. To help narrow your search and avoid analysis paralysis, you can impose certain conditions such as focusing solely on one country, and to look for companies that operate in certain parts of the industry (e.g., focusing only on oil and gas companies that have midstream operations).
Evaluating every possibility is akin to trying to boil the ocean – it’s virtually impossible and for the most part is unnecessary. You don’t need to assess every possibility, just the ones that satisfy the criteria you have imposed.
Understand Exactly What Goals Your Decisions Are Trying to Achieve
So many people can easily forget that the purpose of a decision is to help them advance a goal or higher purpose. If you have a clear understanding of what exactly you’re trying to achieve by making a decision, then the decision making process becomes a lot simpler.
When ordering food, your goal is ultimately to satiate your hunger. Deciding where to order, what to order, and how much you plan to spend should all lead towards satisfying your goal of no longer being hungry.
Goals, when paired with the appropriate parameters, can help narrow down your decisions significantly. By pairing the two, you can reduce the number of possibilities you need to assess because you know exactly what you’re trying to achieve and have clear limits to stay within.
Whether they know it or not, every decision an investor makes is influenced by some sort of higher objective. An investor who loses sight of that objective can quickly find themselves being overwhelmed with countless options.
No investment decision (or, at least, very few) is made on a whim – every decision serves the purpose of helping advance an investor’s goals.
Accept the Reality That no Decision is “Perfect”
Analysis paralysis is more than just the inability to make a decision because of too much data: it’s also what happens when a person is too hung up on trying to make the “perfect” decision.
I’ve never made a decision in my life that never had any sort of drawbacks; I’m willing to bet that you’ve never made a “perfect” decision either.
When making decisions, some people adamantly refuse to settle for anything less than perfect – unless a decision has no flaws at all, then no decision will be made. As all of us know, we all live in an imperfect world.
A good decision isn’t necessarily one that has no drawbacks, nor is it the one with the least drawbacks. A good decision is one that offers the most favourable outcomes, while also offering the most tolerable drawbacks. There’s a big difference between a decision that maximizes strengths and one that minimizes drawbacks.
Process of Elimination is the Name of the Game
You don’t need to assess every possible option – you simply need to boil down your choices to a select few that you seriously plan to consider.
Chances are, you’ve done this before – back in school, when given a multiple choice exam, one of the first things you probably did was eliminate choices that obviously weren’t the right answer. In the end, you were only left with a few options that you could assess in-depth.
As an investor, if you’re looking at 10 different companies you want to invest in, don’t spend your time analyzing all 10. Instead, narrow down your choices, perhaps 2-3 companies, then thoroughly assess those. I’ve previously discussed this analytical procedure of narrowing your prospective investment choices.
Analysis paralysis is most likely to occur when your decision-making process is open-ended, that is, there is no clearly defined scope for your search. Nobody has the time and energy needed to assess every single possibility, so their best bet is to eliminate as many choices as they can and make a decision based on a select few options.
Wrapping Up
Sometimes, a decision that seems trivial at first can quickly devolve into a personal crisis of trying to evaluate countless options, only to end up making no decision at all.
Analysis paralysis is a problem many people face, and as a result, it can quickly destroy a person’s ability to be productive because they spend too much time trying to make decisions.
Thankfully, because analysis paralysis is so well-known, there are myriad ways to prevent it, or at least minimize the likelihood of it from happening.
Investors are no exception to the dangers of analysis paralysis, but it’s important to remember that it’s better to take your time when forming a decision than to not make one at all.
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