Elegant Simplicity
Simplistic, Complex or Elegant Simplicity
The world is a highly complex place. The interconnected, multifaceted world that we inhabit is both dumbfounding and inspiring at the same time.
If you have a moment to read Leonard E. Read’s short essay “I, Pencil,” I think it is well worth your time. How is it possible that a simple No. 2 pencil can exist in this world? How is it possible that no one person on the planet can actually produce that somewhat trivial item?
If you want to explore an updated version of the idea, there’s a TedTalk of someone who attempted to build a toaster from scratch… Let’s just say that he gained a greater appreciation for the global supply chain!
We’re rapidly approaching Election Day, and politicians are making all sorts of promises. And while policies have an effect, it is important to keep in mind that the political world is one small part of the much larger economic process. In this light, I’m reminded of the following quote from Friedrich Hayek:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.”
My translation of the above: emergent order is a bottom-up process that is highly complex, and while the outcome appears to have been “designed,” the reality is much different and considers vast amounts of (dispersed) knowledge.
What does this have to do with financial planning and investment decisions?
When we allocate capital, we are trying to harness as much information as we can. And it is our belief that this information is best found and accessed through the market pricing system. Prices contain information. This can’t be stressed too emphatically!
When reaching a decision, we need to digest information, and yet if we say we want “all the information” we will never be satisfied and we will never be able to act. The information changes moment by moment, and the time involved in computing will mean our original data is out of date!
So, how then should we proceed?
It is my experience that Rube Goldberg-like solutions, while entertaining, are unlikely to produce better outcomes. In the investing world, Rube Goldberg solutions might include market forecasts, market timing, stock picking, “alternative” investments, and the use of leverage. It often feels good to “do something”.
On the other hand, we aren’t looking for “simplistic” answers either.
Elegant simplicity is the goal.
David Booth, founder of Dimensional Funds, once said “I like simple ideas well-executed. My view of life is there’s no evidence that complexity adds a lot of value.”
I recently saw a picture that captured the essence, and the evolution, from complex to elegant simplicity. That photo was of three generations of the Raptor engine for SpaceX.
From an engineering perspective, each is a marvel of design, but the elegance of the latest version appears to be an engine that is more powerful and more streamlined than the earlier models. One would also assume that there are fewer failure points as well.
Summarizing the above thoughts:
- The world and financial markets are dizzyingly complex, interconnected systems.
- To claim the ability to consistently and accurately forecast how the various inputs will result in short-term outcomes is full of hubris.
- We can’t allow uncertainty to stymie prudent activity.
- Elegant simplicity is not simplistic.
- Elegant simplicity allows us to take confident steps to increase probability of success, maintain locus of control, and spend our time on the most important things in life!
Sincerely,
Craig Smith, CFP®, CFA®, CKA®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
