Trying Too Hard by Dean Williams
Here are my conclusions: Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same. And when it comes to forecasting—as opposed to doing something—a lot of expertise is no better than a little expertise. And may even be worse.
SIMPLE APPROACHES. Albert Einstein said that “....most of the fundamental ideas of science are essentially simple and may, as a rule, be expressed in a language comprehensible to everyone.” The first time I heard that I thought, “Sure, that is easy for him to say.” But as long as there are people out there who can beat us using dart boards, I urge us all to respect the virtues of a simple investment plan.
A very special tolerance for the concept of “nonsense”, or what the Zen call “Beginner’s Mind”. I could have saved myself a lot of time if I hadn’t been so quick to label as “nonsense” a lot of ideas I now accept as good sense. Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.
For all of that to make any sense, we all have to believe we can generate information which is unknown to the market as a whole.
There is an approach which is simpler and probably stands a better chance of working. Spend your time measuring value instead of generating information. Don’t forecast. Buy what is cheap today. Let other people deal with the odds against predicting the future.
The most readable treatment of that question I have seen is by a Wharton professor named J. Scott Armstrong. About a year ago he published an article in Technology Review called “The Seer-Sucker Theory”. He collected studies of experts’ forecasts in finance, economics, psychology, medicine, sports and sociology. The summary of the evidence he found is that expertise beyond a minimal level is of little value in forecasting change. His recommendation probably is drawing fan mail from consultants everywhere: “Don’t hire the best expert. Hire the cheapest expert.”
Compared with most academic papers, the way Armstrong words his theory stands out like a hoagie on a plate of watercress sandwiches: “No matter how much evidence that seers do not exist, suckers will pay for the existence of seers.”
The reason for dwelling on the virtue of simple investment approaches is that complicated ones, which can’t be explained simply, may be disguising a more basic defect. They may not make any sense. Mastery often expresses itself in simplicity. Werner Heisenberg, the physicist we met when we were talking about nonsense, said, “Even for the physicist, the description in plain language will be a criterion of the degree of understanding that has been reached.”
Dr. Fox was an actor who looked distinguished and sounded authoritative. He was provided with a fictitious but impressive biography and was sent to lecture about a subject on which he knew nothing. The talk, “Mathematical Game Theory as Applied to Physician Education”, was delivered on three occasions to a total of 55 people. One hour was allowed for the talk and 30 minutes for discussion. The audiences consisted of highly educated social workers, psychologists, psychiatrists, educators, and administrators. The lecture was comprised of double talk, meaningless words, false logic, contradictory statements, irrelevant humor, and meaningless references to unrelated topics. Judging from a questionnaire administered after the talk, the audience found Dr. Fox’s lecture to be clear and stimulating. None of the subjects realized that the lecture was pure nonsense.
“If an unintelligible communication is received from a legitimate source and if this communication claims to be in the recipient’s area of expertise, recipients might assume that they are wasting their time because they receive no useful knowledge. In terms of knowledge, they would be wasting their time.
But their involvement in this activity may lead them to try to justify the time spent. Furthermore, the greater the unintelligibility, the greater the need to rationalize about the time spent (e.g., if you cannot understand a paper, it must be a high-level paper). This might be called the Dr. Fox hypothesis: An unintelligible communication from a legitimate source in the recipient’s area of expertise will increase the recipient’s rating of the author’s competence. “