simple decision making

A very interesting study was performed a while back that tested our human decision making process and information feedback loop.

A group of participants was divided into two groups. Each group was given the same exercises to complete with the understanding that they would be graded on results.

The difference between the groups, however, was that the first group was given a simple set of instructions and straightforward feedback, while the second group was provided with complex procedures and feedback.

As you might imagine the first group consistently outperformed the second.

Furthermore, the first group continued to improve throughout the process while the second stagnated. These results seem interesting and informative on their own. But here’s the truly amazing part ... before the participants received the results, group one participants (outperformance group) were given the option of changing their original answers using the complex set of procedures. Group one routinely chose the more complex system for reasoning – believing that system must be superior. And you guessed it ... their results worsened to the levels of group two.

This seems impossible to believe. They had an effective system producing strong results, yet chose to deviate only because their approach [seemed too simple?]

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I recently read James Montier’s Value Investing: Tools and Techniques for Intelligent Investment. It’s a meaty book that compiles a lot of research. Much of it shows how we are our own worst enemy.

[A] chapter I like is “Keep It Simple, Stupid.” It illustrates another key point about the nature of investing: It pays to focus on a handful of essential details and ignore the rest. Montier shows us experiments in which people made worse decisions when given more information. For example, in one instance, researchers asked people to choose the best of four cars given only four pieces of information on each car. (In the examples, one car is noticeably and objectively better than the others.) People picked the best car 75% of the time. When given 12 pieces of information, their accuracy dropped to only 25%. The added information was more than just extraneous; it made their choices worse.

In the context of investing in stocks, it’s better to focus in on key variables that clearly matter and ignore the rest. My investment process aims to do that by boiling down the many details of investing in a company into four major areas. Too many details spoil the broth, but most investors haven’t learned this. “Our industry is obsessed with the minutia of detail,” Montier writes.