What Is Analysis Paralysis? Definition, Risks, and How to Fix

What Is Analysis Paralysis?

Analysis paralysis is an inability to make a decision due to over-thinking a problem. An individual or a group can have too much data. The result is endless wrangling over the upsides and downsides of each option, and an inability to pick one.

The process of choosing an investment is particularly prone to analysis paralysis. It's easy to get bogged down in an analysis of many options until it becomes impossible to choose one. This inaction can lead to missed chances for profit.

How Analysis Paralysis Works

Analysis paralysis can occur in both routine and complex problems. It often comes from trying to weigh an undefined number of variables.

In standard problem sets, an individual uses basic logic or standard statistical analysis to examine facts related to a potential course of action. The resulting analysis would typically provide a clear answer or at least a pros and cons list that reveals the most favorable options.

Analysis paralysis tends to set in if the research parameters are so vague that no clear choice can emerge.

"Which stock should I buy?" is a question without an answer. A more reasonable question might be: "Which stock can I buy that pays a good annual dividend and is in an industry that is relatively recession-proof?" You can list the options, compare the numbers, and consider their pros and cons.

Analysis paralysis is a very old human problem. See Shakespeare's Hamlet for a classic example of the potential perils of over-thinking a decision.

It has been associated with the business decision-making process at least since the 1960s, when H. Igor Ansoff, a mathematician and business strategist, used the term "paralysis by analysis" in his book Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion.

Special Considerations

The world of technical analysis for investing is highly susceptible to analysis paralysis. Any of a vast range of theories, concepts, and best practices can be used in order to reach a decision on what to buy and when to sell it.

In the investment management industry, analysts build models and fundamental investing regimes that help them make investment decisions. In technical analysis, chartists rely on their knowledge of technical indicators combined with the use of advanced charting software to detect trading signals and arrive at investment decisions.

The concept of fuzzy semantics is often discussed when seeking solutions for analysis paralysis. To mathematicians, fuzzy semantics is the study of problem analysis involving an undefined number of variables.

Fuzzy semantics, fuzzy logic, and fuzzy syntax programming are key to the development of artificial intelligence and machine learning solutions. Broadly, this concept uses decision tree-like analysis to direct an individual to a specified outcome. This type of analysis generally allows for subjective, rules-based programming that allows a user to adjust and customize variables for the automated delivery of responses.

How to Spot and Overcome Analysis Paralysis

Analysis paralysis can occur whether a person or group is considering a major investment, a life-changing move, or where to go for lunch.

According to Psychology Today, the root cause is anxiety. It comes from compulsively weighing an endless number of variables while imagining downsides to all of them. In the end, it is impossible to identify the best option from the rest. Recognizing that anxiety is causing paralysis can help.

Robert Taibbi, the author of the blog post and a mental health professional, suggests that people are particularly prone to analysis paralysis in our era when any subject can be researched to the point of exhaustion. He suggests managing the process by making and acting on a series of smaller decisions that lead up to the main one. And, remember, you can revise and improve along the way.

Examples of Analysis Paralysis

Perhaps the most famous example of analysis paralysis in action is described in a report on a consumer psychology experiment known as the Jam Study. One day, market researchers stocked a market's shelves with 24 varieties of jam and invited shoppers to sample one or more and then choose one to buy. The next day, only six varieties were stocked. The study found that consumers were 10 times more likely to purchase jam if they were presented with only six varieties instead of 24.

The same phenomenon has been replicated by studies involving chocolate, financial investments, and speed dating. Instead of being pleased with having so many options, we feel anxious that we'll make the wrong choice, live to regret it, and blame ourselves. Confronted by too many choices, we freeze.

The Bottom Line

Jeff Boss, writing for Forbes, has a succinct recommendation: "It doesn't matter in which direction you choose to move when under a mortar attack, just as long as you move."

Many decisions require a bit more analysis than that. However, over-analyzing a decision can be at least as damaging as making a decision at random. If you find yourself plagued by analysis paralysis, first define your goals and then narrow your options to include only those few that best match it. Compare their advantages and disadvantages. Then pick one.