The pros and cons of immediate feedback in life and in markets
I recently had an opportunity to try out a continuous glucose monitor (CGM) for two weeks. The purpose of a CGM system is to measure blood glucose levels almost constantly, and this is accomplished with a small device about the size of two stacked quarters that is placed on the back of an arm in a virtually painless process. The device collects data every fifteen minutes and syncs with iOS and Android apps.
CGM systems are intended for individuals who need to manage diabetes but have increasingly been used by those who are just interested in optimizing their overall metabolic health. Fortunately, I am in the latter category. I have no markers of diabetes, but became concerned about maintaining good metabolic health after researching kidney failure, the dialysis industry, and DaVita last year.
Using a CGM provides instant objective feedback about lifestyle choices and makes it easy to associate cause and effect. Initially, I maintained my normal routine and just observed the patterns on the app. I then conducted experiments including eating foods that I knew would spike glucose levels to see how quickly the spike would normalize. Over the past week, I dialed in a diet and routine that minimizes spikes and variability which should theoretically reduce my risk of problems in the future.
This type of instant feedback is a good thing to the extent that it helps someone improve their health. There is no hiding your decisions from the CGM. If you eat a candy bar, drink a soda, or eat a pint of ice cream, the numbers will reflect that decision. You can lie to yourself but not to an implanted medical device.
Now that I know my reaction to various types of foods, exercise, and sleep patterns, I feel no need to use a CGM routinely. Not only would doing so not result in much additional insight but I know myself well enough to realize that I would start trying to over-optimize my life in ways that are likely to become irritating and dysfunctional.
A CGM provides useful and immediate data. But many other types of instant feedback can be highly misleading, especially with addictive substances. Alcohol is a great example. It is common to feel invincible after a few drinks even as our mental and physical faculties are eroding. Smoking cigarettes provides very positive instant feedback while eroding health over long periods of time, so slowly that the damage can hardly be perceived until it is too severe to be ignored. Drinking five Cokes per day feels great but will harm your health unless your name is Warren Buffett.
The list goes on and on.
Financial markets provide instant feedback that is far from useful except to the tiny minority of traders who have the skill to play the market and win. Stocks trade every weekday for six and a half hours. Many commodities and derivatives trade constantly. A verdict is always available after you transact if you take the feedback seriously.
If you are a long term investor, quotes provide instant feedback that is of absolutely no value and almost never has anything to do with the long term quality of your decisions. It is possible to make a terrible decision based on fundamentals that results in terrific short term results, and it is equally possible to make a great long term decision that looks awful in the short run. Value investors have the scars to prove that.
Instant feedback is ever present for managers and other employees who are granted stock based compensation. Constant quotes during market hours serves as nothing but a distraction and employees who tie their perceived financial well-being to quotes are likely to be distracted and perform poorly in their jobs when the stock goes down, especially if their job has no measurable impact on the company as a whole.
While a CEO with a pay package in the eight figures might be able to view stock quotes with detachment, the same is not true for most rank-and-file employees. When the stock rockets up, employees will be distracted with dreams of how to spend their newfound wealth. When the stock plummets, hopes and dreams plummet as well.
Instant feedback is there for anyone who wants it.
There are no great ways to combat the harm of instant information in financial markets. Value investors who have internalized the message of Benjamin Graham, Warren Buffett, Charlie Munger, and others for decades can ignore quotes but that’s tiny minority of investors.
It is obviously better to zoom out when evaluating your results and it is important to find something to anchor to psychologically other than quotes. It is far better to just slow down and realize that instant feedback in markets almost never provides useful information and can do great harm.
I suspect that I’m preaching to the choir, but these principles are not well understood in general. Human beings overweight instant feedback because doing so was a necessity not very long ago in our evolutionary history. It is up to us to understand the situations where instant feedback continues to be useful in our modern world, when instant feedback is just meaningless noise, and when it can actually be harmful.
Easier said than done!