Data Deficiency

Investment Management

Aug 24, 2022

Google founder Eric Schmidt once said: “There were 5 exabytes of information created between the dawn of civilization through 2003, but that much information is now created every 2 days.” In 2012, Andrew McAfee and Erik Brynjolfsson wrote an article for Harvard Business Review titled “Big Data: The Management Revolution” that outlined just how much decision-making at the corporate level would change as companies would now be able to evaluate their customers, employees, and products using endless amounts of data moving forward. They were certainly right. Companies like Amazon, Apple, Google, Netflix, and Facebook have all shown how data can be utilized and monetized successfully on a massive scale. Data has become so vital, the metaphor “data is the new oil” has become an overused platitude. What a time to be alive.

Investments in artificial intelligence and data technology are growing at a rapid pace for companies of all sizes across the globe. Whether you are a person or a company, chances are you have been told that you must be “data driven” to succeed in today’s day and age. There is literally no part of our day-to-day life that the data revolution has not touched in the last ten to fifteen years. When it comes to investing, it is hard to overstate just how much things have changed from the data revolution. Algorithms and huge computers account for most of the buying and selling in financial markets these days. They are also the basis for many investment decisions. You used to have to call a company and ask for them to mail a copy of their quarterly financial reports, now you can access years of reports with a couple clicks. Markets move dramatically in anticipation of the latest economic data. With a couple clicks of the mouse, robo-advisors will automatically invest your entire life savings. Target date funds have become very popular options too. These match your age with the amount of perceived risk you should take in your 401(k) based on your age.

Despite all this information, it’s hard to say we are making better decisions. Here are two points we must constantly remind ourselves of when it comes to being “data driven”, no matter how painfully (annoyingly?) obvious they may seem at first glance:

1. most of it is useless

If you are on the internet reading this right now you do not need to be told we are living in the age of “big data”. Still, try and grasp these numbers: at the beginning of 2020, it was estimated that the number of bytes of information in the digital universe was 40 times bigger than the number of stars in the observable universe. By 2025, it is estimated that the amount of data being created on the internet each day will be 463 exabytes. If you’re like us (and 99.9% of people), you don’t know what an exabyte is. So for context, the number of words ever spoken in the history of humankind is estimated to be 5 exabytes. It is impossible to comprehend the amount of data being created every second of every day.

How much of it is useful though? We have access to a never-ending amount of economic data, political polling, nutritional information, cat videos, and anything else we want at our fingertips. Despite access to all this information, we are constantly being nudged, prodded, scared, and sometimes even tricked into poor decisions. Most of it becomes stale faster than a carton of milk. We have so much information it is getting harder and harder to tell what is useful and what is not.  

Robert Klosterman uses the old saying “signal versus the noise” to expand on this idea. “The phrase “signal versus the noise” originated with radio operators. In the early years of radio technology, there was always a lot of static on the receiving end. It was vital to differentiate between the signal and the noise. What was valuable (the signal), and what was simply noise? Writer Shane Parrish sums it up more concisely: “Most information is irrelevant. Knowing what to ignore saves you time, reduces stress, and improves your decision making”.

2. It is all based on the past (which can be a big problem)

Have you gone on vacation this summer and noticed your Waze, Apple, or Google Maps acting up? Experts think this may be due to the last two years of the pandemic. These apps refine their routes based on past data. As travel became less common and fewer commuters and travelers were on the road using the apps, the quality of these datasets was likely impacted. One of the most consequential examples of this in the investing world would be the Global Financial Crisis of 2008. Many financial institutions and investors got themselves into trouble because they used datasets to build models that did not contain scenarios where housing prices declined broadly. That is because in the Post-World War II era that hadn’t really happened. Then it did. As Marshal McLuhan said: “We drive into the future using only our rear-view mirror.”

A present-day example would be how so many people are using inflation data or previous stock market selloffs from the past to try and predict what will happen next. As Howard Marks says: “you cannot predict, you can prepare.” An over reliance on data to make decisions can be risky because history is an endless lesson in how the future rarely ends up looking like the past. Still, for some reason we are always still surprised when it doesn’t. The world changes too fast and too often to successfully predict what will happen next on a regular basis. Economist Allison Schrager sums our modern day problem of relying on data too much:  

“The open secret is that data makes us slaves to the past. And when the world changes, data no longer tells us as much about the future, and we can end up making worse decisions. Coming out of the pandemic has caused significant chaos and changed many things about our lives. How it affects the data we use to make future decisions will matter for years to come.”

That is not all to say using data is not helpful. Obviously, it is. It’s just that bad data can lead to bad decisions and worse outcomes. Information and actionable knowledge are very different things. Everyone’s situation is unique, and it is hard to capture someone’s life, goals, and relationship with money in a spreadsheet or algorithm. Should your retirement account be managed based on one data point (your age) and nothing else? A good financial plan should not be a hypothetical or rigid formula based on data from the past. Instead, it should be based on what you want your future to look like. It should be rooted in a process of disciplined decision-making that remains flexible for when things inevitably change in a way all the exabytes of data in the world could not have predicted.  


Big Data: The Management Revolution, Andrew McAfee and Erik Brynjolfsson, Harvard Business Review, October 2012

How Much Data Is Created Every Day?, Branka Vuleta,, October 28, 2021

Shane Parrish, Farnum Street Brain Food Blog, July 24 & July 31, 2022

Big Data’s Past Is Messing With Our Future, Allison Schrager, Bloomberg Opinion, July 6 2021

When Data Fails, Nick Maggiulli, Of Dollars And Data, August 16, 2022

Smart Investors Ignore the Noise, Robert Klosterman, Kiplinger, July 7, 2016


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