Is it Human Nature To Distrust Simplicity?

A colleague recently shared a blog that in essence questioned why quantitative investment strategies, and specifically trend following, was not more widely embraced by the investment management industry. It was a compelling question that prompted me to consider a larger one: Is it human nature to distrust simplicity?

The Blueprint Investment Partners team bantered back and forth a bit in Slack about the topic, but agreed the simplicity of systematic investing was difficult for many to appreciate.

In my opinion, the financial services industry is infected with confirmation bias – or simply put, many folks start with a conclusion and then try to validate it by seeking evidence to prove their thesis is correct without considering the other possibilities.

Starting with clear codified rules that behave dynamically based upon empirical data does not fit into that paradigm. In fact, it’s the antithesis of confirmation bias, which can make some people uncomfortable: If it is too simple, it cannot be correct, right? Wrong!

Human Behavior Can Work Both For & Against Us

Human behavior, and in this case, human investment behavior (aka behavioral finance), is influenced by both our conscious thoughts and actions, as well as our subconscious mind. The latter is more powerful and more influential than most realize. Our subconscious mind is a reservoir of feelings, urges, habits, and memories that are drawn upon in our day-to-day decision-making. Some theorize the subconscious drives more than 90% of what we do and how we show up in the eyes of others. Breathing is the best example – we do not even think about that, even though it happens constantly.

Experience also shows up in our subconscious thoughts. I spent many years in banking and learned to spot every risk possible when evaluating a business opportunity. That’s what bankers do, right? Try to figure out how to say no? In my case, this infects my fundamental thinking around investing.

Have you ever had the intuition that you should take advantage of an investment opportunity, but you had a long list of reasons why the risks were too great? Later you determined that the positive attributes of the opportunity played out and you should have made the investment. That is the challenge of attempting to consciously make these types of decisions. Some people are very good at fundamental analysis amid a constant barrage of data, but the majority are not.

Many generally agree that what occurs in the financial markets is an outcome of human behavior, both the good and bad outcomes. If our conscious behavior can just as easily work against us as help us, then why do most of us (including me) want to make things more complex than necessary? Why do we naturally distrust solutions, concepts, or opportunities that seem too simple or straightforward?

Too Much Subconscious is Like Dousing Fire with the Gasoline of Fear

Most financial advisors focus on providing guidance to their clients around savings and spending habits that will support their financials goals. But these are just outcomes of good habits and behaviors. Some of us are wired to do these things naturally, while others really struggle with sticking to the plan. Have you ever met a thrifty spouse whose great habits were derailed by the spendthrift habits of their partner?

More often, financial plans are derailed by market conditions that cause the conscious mind to question the great habits and behaviors espoused by the financial advisors. The conscious mind often sees things like volatility and price corrections as being permanent conditions rather than a natural component of financial markets, while our subconscious acts like an accelerant, dousing conscious observations of risk (“fires”) with the gasoline of fear. The conscious mind may then cause us to abandon the plan, even when our subconscious advises otherwise.

A Battle Between the Head & The Gut

Back to the title of this blog, I really do not think that it is human nature to avoid simplicity. Rather, it appears to be a head versus gut thing. The gut is instinctual (think: fight or flight) and more likely to pursue simple solutions, but the head is analytical and more likely to choose complexity or even the perception of complexity.

Investing is an arena where this battle between head and gut is particularly brutal.

What if you could circumvent this battle with a with a rules-based plan that automatically adapted to market conditions? One that allowed you, as the financial advisor, to consciously take the necessary market risk to help your clients achieve their financial objectives, while allowing your subconscious to trust that a plan is in place to manage that risk automatically.

Elegance Can Be Simple & Robust: Systematic Investing

A major strength of systematic investing is its reliance on very clear empirical data to adjust portfolio allocations based upon trends in the price of the asset. Price is elegant and real. It is simple.

Advisors should seek the most elegant and simple solutions that increase the probability of their clients’ financial success. For many, this requires a price-based strategy that can ignore a lot of the fundamental uncertainty of the financial markets. At least until price dictates a change, of course.

It’s that simple.