A Theory of Information overload applied to perfectly efficient financial markets

TL;DR

This paper introduces a model demonstrating that excessive information can lead to deviations from market efficiency, highlighting the impact of information overload on financial market behavior.

Contribution

It presents an original theoretical model linking information overload to the breakdown of the efficient market hypothesis in modern financial markets.

Findings

Market efficiency breaks down with infinite information

Less than maximum information use can be suboptimal for investors

Information overload causes deviations from traditional market models

Abstract

Before the massive spread of computer technology, information was far from complex. The development of technology shifted the paradigm: from individuals who faced scarce and costly information to individuals who face massive amounts of information accessible at low costs. Nowadays we are living in the era of big data and investors deal every day with a huge flow of information. In the spirit of the modern idea that economic agents have limited computational capacity, we propose an original model using information overload to show how too much information could cause financial markets to depart from the traditional assumption of informational efficiency. We show that when information tends to infinite, the efficient market hypothesis ceases to be true. This happens also for lower levels of information, when the use of the maximum amount of information is not optimal for investors. The present work can be a stimulus to consider more realistic economic models and it can be further deepened including other realistic features present in financial markets, such as information asymmetry or noise in the transmission of information.