Simplicity, Complexity, and Chaos

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“Life is really simple, but we insist on making it complicated.”
– Confucius

A Great Read

Our team here at Concentus recently discovered a great article from Farnam Street that we all really loved, and we hope you will enjoy: “Complexity Bias: Why We Prefer Complicated to Simple.”

The article is somewhat lengthy, but it’s worth a read. In essence, it explores the human cognitive bias known as “complexity bias,” a hardwired human tendency to “give undue credence to complex concepts.” The article discusses two primary implications of complexity bias that I found quite interesting and that are particularly useful to understand in relation to investing and wealth planning.

Keep it Simple, Stupid!

First, humans are hardwired to prefer the complex to the simple. When faced with a problem we are uncertain how to solve, we will usually choose the more complex solution over the simple one. This is primarily because we instinctively perceive complexity when it is not really there, and we think that problems are more complicated than they really are. As the article states, “We may ignore simple solutions – thinking “that will never work” – and instead favor complex ones.”

As Confucius said, “Life is really simple, but we insist on making it complicated.” Our complexity bias can sabotage us because it causes us to apply inappropriate solutions to most of our problems; that is, we seek to apply complex solutions when simple ones will do.

Many people fear that wealth planning and investing are incredibly complex topics that they are not fully equipped to understand and that the achievement of significant financial success will require them to wrestle with a great deal of complicated information and decisions. Popular culture and the financial media would have us believe that investing is a difficult puzzle and that mastering that complexity in order to “beat the market” is our only hope for long-term financial success.

Very often, people become bogged down by this tendency to overcomplicate their planning and feel a lack of clarity about taking action. In turn, this anxiety causes people to take no action at all; they put off the vital process of designing and implementing an effective wealth plan until they feel more confident in their knowledge or skills or until “things seem more stable” in the markets or the world.

Investing and wealth planning can be surprisingly simple if we let them be. When we understand the simple yet fundamental truths of the history of capital markets, we can achieve great clarity and replace the anxiety and confusion that come from lack of understanding with a sense of peace and the ability to act with confidence. We can ignore the noise of the media and popular culture because we know the fundamental long-term truth of the capital markets.

Are We All Just Pigeons?

The second implication of complexity bias is that it causes us to confuse complexity with chaos. Certain things in the world are simply chaotic, defined as “in a state of total confusion with no order.” When we make the mistake of perceiving complexity when there is really just chaos, we believe that there is a complex order we can “figure out,” where in fact there is only randomness and no order.

This article makes an amusing example by citing a study in which pigeons were placed in cages that delivered them bits of food at random. Despite the random nature of the food delivery, the pigeons came to believe that their behaviors, such as bobbing their heads in a certain way or pecking at the cage, would influence the delivery of food. They came to believe in the superstition that there was some kind of behavior they could repeat that would enable them to win more food.

Although it is easy to laugh at the foolishness of these pigeons, are we any smarter than pigeons when we superstitiously believe that wearing our “lucky shirt” to our weekly poker game will cause us to win more hands?

This bias can have important implications in our investing and wealth planning because investment markets can also act in a “chaotic” and random way, particularly in the short run. Investors who develop intricate and complicated rituals for predicting short-term movements in the markets may find that they are really just at the mercy of chaos – they are pigeons, spending a great deal of time and energy trying to predict random market movements in vain.

As we extend our time horizon, the behavior of investment markets becomes far less random and chaotic and much more predictable. Over the last 100 years, through bull and bear markets and despite great short-term volatility, the stock market has averaged close to 10 percent per year. As we examine 5-year, 10-year, 20-year, and 30-year periods of time, average annual returns tend to revert to that average as the time period extends.

Perhaps as investors, we are better served to forget the mysterious and superstitious “complex” strategies for predicting short-term movements in markets, and instead rely on the simplicity of understanding the long-term truth of stock market growth.

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About the Author:

Erik is one of the co-founders of Concentus Wealth Advisors and currently serves as the Chief Executive Officer of the firm. With over 25 years of industry experience, Erik guides the firm’s overall strategy. After graduating from Amherst College in 1991, Erik spent a year working with Rittenhouse Capital Management, before joining Gerald in 1992. Erik currently holds his general securities registrations and insurance licenses, as well as CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant designations. In addition to his formal designations, Erik has appeared on CNBC’s Worldwide Exchange, Fox News’ America’s News HQ, Live Well’s Mary on Money, CN8’s Money Matters Today and The Real Estate Connection. In 2012, Erik was one of thirteen advisors named to Main Line Today’s Top Financial Advisors list. Erik lives in Bryn Mawr, PA with his wife and three children. He serves on the boards of the Philadelphia Chapter of the Salvation Army, Acting Without Boundaries (serving young people with disabilities) and The Holy Child School at Rosemont. In addition, he is on the financial advisory board of the Sisters of St. Francis in Media, PA.

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