Keep It Simple, Stupid

'Keep It Simple, Stupid'

The sage advice of James Montier when thinking about behavioural decision-making in investment. Too often we get bogged down in data, technicals and complexity that it distorts the objective of what you are trying to achieve. Simplify the process wherever you can and ask yourself if you really need that extra bit of information.

Mr Montier references a great paper by Tsai et al. (2008), which tested American football fans' ability to predict the outcome of games.

The researchers took 30 qualified (they had to complete a test) students and offered them statistics on teams such as fumbles, turnovers, yards gained, etc. The information was offered to them over 5 rounds with each round revealing 6 items of info (called cues).

They also asked the students how confident they were in their predictions as each round passed.

The outcome?

The accuracy of the predictions in round 1 was c.62%. As each round passed, the accuracy remained around that level. Therefore, not improving with the additional information. What do you think happened to the confidence of the students? Yes, you guessed it, it rose each round (69% in round 1 to 80% by the time they had 30 'cues' in round 5).

We are human. Not supercomputers, therefore if your process if overwhelming relying on human factors, you are likely to fall into this trap. It also means rather than gathering a lot of different information, we should just focus on a smaller but important subset to inform your decision-making.

As Sherlock Holmes said in 'A Study in Scarlet':

"The brain is like a little empty attic and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out".

Whether you are a fund selector, portfolio manager, analyst, investor, financial planner or general business partner, you must be selective over the information you are taking in when making investment decisions/recommendations and remember to try to be more like Sherlock.