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Why selective evidence distorts markets more than outright lies
New research shows that selecting which evidence to show distorts decisions more than hiding facts. The finding applies directly to how traders should read earnings calls and filings.
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A new experiment from five economists suggests that the way people present information matters more than what they hide. The finding has direct implications for how traders, analysts, and executives should read corporate communications.
The study, led by researchers at the University of Chicago, New York University, and Princeton, tested a model where an informed sender picks which verifiable evidence to show a receiver. The sender could either conceal unfavorable facts or select favorable ones from a larger pool. The receiver then made a decision based on what was shown.
The key result: selection distorted receiver behavior far more than concealment, simply because it happened more often. Senders selected evidence in roughly 60% of trials where they had the option, while outright concealment occurred in fewer than 20%. Even though receivers misjudged both tactics by similar margins, the sheer frequency of selection made it the dominant source of error.
Some senders in the experiment consistently overcommunicated relative to the model's predictions. The authors labeled them "deception averse" – they showed more evidence than a purely strategic sender would. Receivers, for their part, responded too optimistically to both concealed and selected evidence, with errors of roughly equal size.