Paul Andreassen

Paul Andreassen is a psychologist whose experiments with business students at MIT examine how financial news affects investment decisions. His central finding, as presented in the book, is counterintuitive: students who saw only stock-price movements did better than students supplied with a continuing stream of reports about those movements. The comparison gives concrete form to a wider concern about how information can distort judgment when it is overemphasized or shared too prominently.

The MIT Experiment

In the late 1980s, Andreassen divided business students into two groups, each of which selected a portfolio of stocks and had enough information about its holdings to estimate a fair price. One group could follow only whether its stocks’ prices rose or fell; its members remained free to buy and sell. The other group saw the same price changes but also received a constant stream of financial news that purported to explain them.

The less-informed group did better. The result did not mean its members possessed more facts: they had less incoming information than their counterparts. Rather, the contrast showed that adding news to an existing basis for valuation did not necessarily improve the decisions students made with their portfolios.

News and Overreaction

Andreassen suggested that reports tend to magnify the significance of whatever development they describe. A falling stock was framed as a warning of further trouble, while a rising one seemed to promise continuing gains. Students who received the news therefore reacted as though each item carried excessive weight, buying and selling more frequently than those who saw only prices.

The price-only group, by contrast, had little choice but to stay focused on the fundamentals it had used to select its stocks in the first place. Andreassen’s experiment thus distinguishes the presence of information from its usefulness: a steady explanation of price movements can redirect attention and encourage overreaction rather than sharpen judgment.

Place in the Book’s Argument

The experiment appears in a discussion of herding and the difficulty of making independent decisions when people are continually told what other market participants think. Financial coverage can make other investors’ reactions conspicuous, so that each decision is shaped by visible market sentiment as well as by an investor’s own assessment. Andreassen’s finding adds a separate but related caution: even without setting aside herding, an abundance of news may undermine good decision-making by making each new report seem decisive.

The book places this case alongside its broader account of collective judgment, which argues that crowds can make accurate estimates when their members bring diverse information and their judgments remain independent. Andreassen’s experiment supplies a counterpoint to the simple equation of more information with better collective intelligence. In this case, the students who received more reports performed worse, because the added information encouraged excessive responses to particular developments.