In a recent interview with Smart Money magazine, finance contrarian Nassim Taleb discusses one of the reasons more information does not always improve the quality of our decisions. There are rapidly diminishing returns to the number of new pieces of information we factor into a decision. Yet more information has the psychological effect of increasing our confidence in the correctness of our decision making process. This overconfidence impairs our ability to evaluate our current decision against viable alternatives.

SM: Explain what high-frequency information is and why it’s bad for you.

NT: Here’s a simple example. Psychologists ran experiments to see how people absorb information. In one experiment they found people who work with racehorses, and asked them to name up to 50 pieces of information they would need [to determine if it was going to be a winner]. They ranked them by order of importance. They took the 10 most important ones out of 50 and looked at the prediction of accuracy to determine if a horse will win a race. Then they took the 20 most important pieces, then the 30. In the end, you had no gain in predictive power beyond the first 10 pieces of information, but a huge gain of overconfidence…

I showed in the book that if something has a 93% probability to happen over a year, in one second the chances of it happening are 50-50. If you sample it at a smaller frequency, there’s more information and less noise. You would think your brain can handle cleaning up the noise, but it can’t. We have cognitive impediments that make us very vulnerable to information overload. You get like a pot that you fill up with water. Too much information is bad for your ability to see the meaning. This is the second effect; I call it a scaling problem.

People ask, Isn’t information good for you? Information is good for you, but try to filter it. Your brain can’t handle filtering itself. For example, you will feel good if your portfolio performs well two hours in a row. It’s insignificant; it does not reflect your abilities or the abilities of your manager. You feel good without knowing why. Likewise, having the opposite will put you in a bad mood, without the faintest idea why. Basically, noise can control you because you don’t use your cognitive skills when looking at data at a high frequency.

Read the full interview: Smart Money — Chance Encounters with Nassim Taleb