We are biased towards complex and featureful products and services, and marketers take advantage of it
10-May-2019 •Dhirendra Kumar
We, modern consumers, have been trained to believe the following: The world is too complex for me to understand. I need experts to help me make decisions. Since experts deal in complex things, they end up speaking in a complicated language. Therefore, we get the impression that anyone who speaks in a complicated language must be an expert, and anything that is expressed in a complex way must be good.
I first wrote about this being a barrier for good decision-making in personal finance a decade ago. Across every field of personal finance, right from bank accounts to credit cards to mutual funds to insurance to brokerage accounts, products are designed with the mindset that complex is good and more complex is better.
Sometime ago, a young person who was working as a 'relationship manager' (banking term for salesman) asked me about the formula for asset allocation. He wanted to put his 'clients' numbers', as he called them, into a formula and come up with how much of their money they should put into different types of assets. I told him the truth, which was that deciding someone's ideal asset allocation was more like having a set of thumb rules, and then figuring out which to apply and which to ignore based on their life's circumstances. There are so many soft inputs, as well as non-quantifiable inputs that the very idea of having a formula is a gross misconception.
The salesman was deeply disappointed. He expected something with alphas, gammas, sigmas, pi's, and taus. If there was some calculus required, that would have been better. That would be something very impressive to pull out before his clients. He told me that he was disappointed. He implied that there must be some formula that I was either ignorant of, or wanted to keep him ignorant of.
Warren Buffett's famously said that, "If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers." To be a successful investor one didn't need any more maths than plain old addition, subtraction, multiplication and division. However, don't tell that to the professional peddlers of complexity who seem to infest the world of investing.
In fact this disease goes beyond personal finance and inflicts investing and corporate finance also. This reminds me of a conversation about credit ratings I had perhaps fifteen years ago with a senior banker. At the time, I naively used to think that credit ratings must be useful for bankers to figure out whether a borrower was creditworthy or not. Much to my surprise, this gentleman told me. "There are only two ratings actually," he said, "those who are going to return your money, and those who aren't. And a banker knows deep down which borrower is which. Ratings are only for formal purposes." From his perspective, the ten or so different ratings, outlooks and variations that credit rating agencies issue are just activity.
So what is the test of complexity? How can we, as investors, figure out whether something is simple or complex. That's actually very simple. If an investor (whether an individual or a professional) examines a product and is unable to figure out whether it's simple or not, then how can it possibly be simple? If you need somebody to explain the product to you, then it is self-evident that it is a complex product.
Recently, I came across a blog post on The Farnam Street Blog (look it up) about whether people have an innate bias for complexity. The post says that this bias "is an innate logical fallacy" that leads human beings to give 'undue credence to complex concepts'. Faced with two competing hypotheses, we are likely to choose the most complex one. As a result, when we need to solve a problem, we may ignore simple solutions -- thinking "that will never work" -- and instead favour complex ones.
That's probably true, but it doesn't mean that we are slaves to this instinct. Like other biases, if we are aware of it, then we are a step closer to resisting it!