My last couple of posts on LinkedIn have been related to the finance industry explaining things better to clients. The phrase “complexity” always comes up (the first point in Dan Mikulskis’s post) so it got me thinking about what complexity actually is and how do we avoid it?
It turns out that trying to work out complexity is quite, well, complicated (a customary google search reveals a lot of theories about systems). The reason being is that anything can be made complicated.
Take for example 1+1=2
I asked our resident geeks (our systems development team) whether 1+1=2 and what followed was a 45-minute debate. I won’t recount the debate here (mostly because I didn’t understand it) but, needless to say, it was very confusing and complicated.1
This led me to realise that, actually, complexity – or at least the perception of complexity – is entirely down to how people explain things. The more detailed and laboured the explanation, generally, the more complicated people think things are.
As I saw with our geeks – even simple things can be made complex. Therefore, the idea that one thing is more complex than another doesn’t necessarily make sense.
So in finance and pensions where there is an issue of “complexity”, to me that is an issue of the industry’s own making through its (poor) explanations. For example, “derivatives are more complex than equity” is something I often hear. That is only true if you have simple explanations of equities (which can be very complicated if you delve into the details of equity and how it works) against overly detailed explanations of derivatives.
I think the issue comes from the types of individuals in the finance industry. Clearly, I am making a broad generalisation, but I would argue finance industry workers are, on the whole, more analytical. Therefore, we may presume that the best way to explain something is analytically when, in actual fact, investors just want to be given sufficient information in a simple form to make an informed decision.
Think about planes – most people when they get on a plane do not do the maths – they just know what a sensible plane looks like.
The good thing, though, is that as much as complexity is the industry’s own making – the industry can improve and make things better.
The key question we need to ask ourselves when explaining things is “what tools do investors need to make an informed decision?”. For some investors that may be the maths but for many it may just be some basic principles.
So back to the question of what complexity is and how to avoid it – it is implied in Dan’s post – complexity arises when things are not explained well. The solution is to keep things simple – this in itself can be very, very difficult and time consuming, but I think it is definitely worth the effort.
1The most understandable way of thinking about how 1+1 doesn’t always equal 2 is if you consider what the “1” is – if it is a water drop then 1 water drop plus 1 water drop equals 1 water drop.