Why behaviour is more important than information in delivering an investment edge

Co-authored by Susie Grehl, Executive General Manager, Wealth and Private CBA and James Foot, Chief Investment Officer, Commonwealth Private.

For much of modern market history, investment advantage was based on access. Better information, deeper research, sharper analysis were often the traditional sources of edge, and for a time, they worked.

Today, that equation has changed and information is no longer scarce. Markets are flooded with real-time data, research, and increasingly sophisticated AI-driven insights. Analytical tools that once belonged to institutional investors are now readily available, lowering the barriers to entry and eroding any lasting advantage.

Despite this progress, human behaviour is one aspect of investing that hasn’t kept pace. In fact, as access to information has improved, the behavioural challenge has arguably become even more pronounced.

When more information leads to poorer decisions

Investors today operate in an environment designed to provoke action, where news flows constantly, opinions are amplified across multiple platforms, and market stories change quickly. The attention economy rewards quick reactions and immediacy, not patience or discipline, creating the paradox of investors having more information than ever but feeling less confident about how to use it.

This is where behavioural patterns develop, as short-term results increasingly influence decisions, time horizons shorten, and the temptation to follow what has recently worked, or to disregard what hasn’t, becomes harder to resist. It’s the classic ‘grass is greener’ adage, now accelerated by technology.

Artificial intelligence is heightening this effect. Faster insights and greater confidence in models can create the illusion that more frequent decisions lead to better outcomes. In reality, it often has the opposite effect where increased activity can diminish returns, especially when driven by noise, rather than fundamentals.

The real challenge in investing is to stay disciplined.

The changing sources of investment advantage

Historically, an investment edge could be classified into three categories: informational, analytical, and behavioural.

The first two have become increasingly difficult to sustain. In public markets, where regular disclosure is the norm, informational advantages are quickly lost. Analytical skills, once a point of distinction, are now becoming a commodity. That leaves a behaviourally driven edge – managing one’s own psychological biases and exploiting the irrationality of others – as a potentially more durable, though often overlooked, source of advantage.

Markets, over the long term, tend to be highly efficient. This is the ‘wisdom of the crowd’ in action, where a group of participants with different views and information collectively push prices towards fair value.

However, in the short term, this diversity may break down. Periods of fear or greed can dominate, leading to what could be described as the ‘madness of the mob’. Prices may drift away from fundamentals, because of how investors collectively react to new information.

Social media and digital platforms can exacerbate this trend. Algorithmic effects can create echo chambers, reinforcing a single narrative and reducing the diversity of perspectives that markets rely on to operate effectively. That makes avoiding groupthink a practical necessity for investors.

Filtering what matters from what doesn’t

In this environment, one of the most valuable skills an investor can master is the ability to filter information efficiently.

A useful starting point is to identify what is both important and knowable. Some events are clearly significant but inherently uncertain in their timing or outcome, with the COVID lockdowns being a prime example. Trying to invest based on these unknowns often leads to poor decisions. Instead, investors should focus on factors they can control and incorporate uncertainty and risk management into their overall strategy.

Another guiding principle is the time horizon. Relying on short-term data to inform long-term decisions is a common and costly mistake. If a piece of news is unlikely to matter in three years, it’s unlikely to justify changing a portfolio today.

This approach requires discipline, especially during periods of heightened volatility. It also needs a degree of self-awareness. Investors should recognise whether their decisions are driven by fear or opportunity.

Understand the bias traps so you can avoid them

Many investors can fall into familiar psychological traps without realising it. They may favour local stocks over global opportunities, a ‘home bias’ that limits diversification, or they may chase the latest market trend because recent gains feel more important than long-term fundamentals, which is known as ‘recency bias’. Then there’s the ‘overconfidence bias’, which can lead them to trade too frequently, believing they can outsmart the market.

Loss aversion can cause investors to cling to underperforming investments and sell winners too early, a behaviour known as the ‘disposition effect’. Meanwhile, mental accounting and ‘status quo bias’ can make people treat different pots of money inconsistently or avoid rebalancing their portfolio, simply because it feels easier to leave things as they are.

Then there’s ‘confirmation bias’, where investors seek out news that supports their existing beliefs and ignore warnings that might improve their situation.

The significance of portfolio construction

A well-diversified portfolio is one of the most effective tools for managing bias and behavioural risk. By ensuring outcomes are not reliant on a single scenario, diversification reduces the emotional pressure that can lead to reactive decisions. It also helps investors maintain perspective during periods of market stress.

When portfolios are too heavily concentrated, volatility can appear overwhelming. When they are diversified across various sources of return, it becomes easier to stay committed and follow a long-term plan.

Preparation is key here. The worst time to discover a lack of diversification is after an asset has been priced down. Your portfolio should be robust enough to avoid overexposure to a single asset class, sector, or geography.

Resilient portfolios are built in advance, with multiple scenarios in mind. This is where techniques such as scenario analysis and ‘inversion’ thinking can be useful. By asking what could go wrong in advance, investors can better prepare for negative outcomes and avoid being caught off guard.

Finding signals amid noise

Not all volatility is significant. Markets move for many reasons, and not all of them reflect changes in underlying fundamentals. Liquidity dynamics, positioning, and short-term sentiment can all cause price movements that are ultimately temporary.

Reacting to this kind of noise can be harmful. Selling during periods of stress can lock in losses, while chasing momentum can lead to overpaying for assets that are already crowded.

A more effective approach is to evaluate whether volatility indicates structural change or just temporary factors. Although this isn’t always straightforward in real time, using a disciplined framework can help.

Investors should consider indicators such as market expectations, positioning, and recent performance to assess whether sentiment has become too one-sided. Extreme optimism often indicates higher risk, not lower. Conversely, forced selling driven by liquidity needs can depress prices irrespective of intrinsic value. For disciplined investors, such episodes of technical illiquidity may present compelling entry opportunities, as pricing reflects sellers’ constraints rather than underlying asset fundamentals.

Discipline as a long-term advantage

Over time, markets generally reward patience and discipline, but the journey is seldom linear.

Drawdowns and periods of volatility are a normal part of investing, particularly in growth assets. Investors who anticipate volatility are less likely to overreact to it, and those who don’t, risk making choices that are adverse in the long run.

In today’s environment, particularly where AI has increased the speed and tested the integrity of information, the true advantage goes to the investor who’s best at ignoring what doesn’t matter.

That requires a clear framework, a well-constructed portfolio, and the discipline to stay the course when it matters most. After all, when information is abundant, restraint is what most distinguishes successful investors.

To learn more about how Commonwealth Private can help you with your private banking needs visit commbank.com.au/private

The article provides general information and has been prepared without taking into account any of your objectives, financial situation, or needs. You should consider whether the information in this article is appropriate for you before you act on the information. Eligibility criteria applies. Investment carries risk. No liability is accepted by Commonwealth Private, its related entities, agents and employees for any loss arising from reliance on its content. Commonwealth Private Limited ABN 30 125 238 039 AFSL 314018 (Commonwealth Private), a wholly owned non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48123 123 124 AFSL and Australian credit licence 234945 (Commonwealth Bank). Private Bankers are representatives of Commonwealth Bank and Investment Directors are representatives of Commonwealth Private.