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(Addendum) Keeping It Simple: Why we need to battle our complexity bias
Just a quick addendum to my previous post urging retail investors to favour simpler investment strategies over complex. Our complexity bias is our tendency to overcomplicate things because we believe that advanced solutions yield better results. Quite often, a simpler solution will yield the same result, if not better.

In my original lengthy post, I omitted a reference to an excellent piece of research about our tendency to add, rather than subtract. Cognitive research that utilises Lego is always going to get my full attention.

"When people want to improve something, they tend to only think about what they can add, not consider what they might take away. My collaborators and I have a series of observational studies showing that subtractive changes are psychologically inaccessible unless we prompt or cue or remind people to think about subtraction as an option."
Professor Gabrielle Adams
University of Virginia

The elegance of subtraction applies to many areas of our lives. Train your brain to think subtraction first, before you look to add.
When you look for opportunities to improve your investing process, ask yourself if there are unnecessary steps you can remove.
For example, do you have redundant metrics in your financial statement analysis spreadsheet? Are you using multiple liquidity and solvency ratios that pretty much tell you the same thing? Are you piling on the indicators in your stock charts that only serve to dilute your focus?

Maybe you've even included some steps that are a net negative. Is reading other people's opinion about a stock on Seeking Alpha or Twitter muddying up your own decision-making process? You want to make sure to cover any blind spots, but at the same time you might want to ease up on going down those social media rabbit holes.

When we stay conscious about our natural inclination to just add, we become more focused on streamlining. This is one luxury we have as retail investors over our institutional counterparts. Institutional investors are expected to have all their bases covered. They're expected to turn over all the stones in a rigid, comprehensive, in-depth analysis process. Anyone who has invested in the stock market for a reasonable length of time knows that returns aren't a linear function of effort expended. Past a certain level of due diligence, diminishing marginal returns really start to kick in. This is because of the uncertain nature of predictive fields like investing and trading. Piling on more and more input variables doesn't necessarily equate to better predictions. A light, well designed, streamlined process can produce just as good a result as a lengthy, detailed, exhaustive one. Lucky for us, a light, streamlined strategy is very accessible to the retail investor, but probably frowned upon in the institutional world. It might even be one of our edges.

YouTube
Less is more: Why our brains struggle to subtract
When solving problems, humans tend to think about adding something before they think of taking something away - even when subtracting is the better solution....

Jazzi Young's avatar
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