Complex vs Simple Wealth Solutions

It has always been of particular interest to me how people make decisions in different situations and how it can sometimes be explained by economic and psychological factors. In many ways, I feel it is only by learning how our choices are influenced by our environment and our own tendencies as human beings that we can take intentional steps to do better for ourselves. Research and reflection can be very useful for this.

Recently, I was forwarded a link to an article titled, “Adding is favoured over subtracting in problem solving”, which I found to be quite interesting and rather applicable to many situations.

The piece of research cited in the article, conducted by Adams and colleagues at the University of Virginia, was done to examine if people consider changes that reduced the components of an object, idea, or situation as readily as they are to consider those that added components instead.

Our bias toward adding rather than reducing.

By conducting experiments and examining archival data, the researchers found that because subjects usually considered a small number of plausible solutions to a problem to prevent excessive mental load, they were more likely to think of strategies that added rather than removed elements, even when a subtractive option could have been better.

For example, when they were asked to increase the strength of a Lego structure, they were more likely to suggest adding bricks for support rather than removing ones that were out of place to stabilise the structure and achieve the desired outcome.

It was also found that the subjects were more likely to arrive at good subtractive solutions when they were:

  1. Told specifically that they were possible,
  2. Allowed more time to come up with their answers, or
  3. Under less mental stress.

The conclusion seems to be that people tend to bypass such solutions to make deciding easier and quicker.

Other than Adams and colleagues’ suggestion that subjects often neglected to even consider subtractive solutions, the author of the article itself proposes that there are some other reasons that could contribute to this bias.

In addition to failing to consider them initially, when subtractive solutions do come to mind, they may still be passed over because the additive approach could be seen by others in more favourable light—as being more of a new contribution, or as being less offensive to the originators of the current state. They could also sometimes feel like more creative of a proposition or feel less in conflict with the status quo on account of the time and effort already spent on producing the previously chosen strategy.

Whatever the reason (or combination of reasons), the results of the cited study seem to suggest that this bias can manifest in a variety of contexts, and money is certainly one of them.

When we think more stuff is better.

When thinking about how to improve our lives, for example, we may entertain the thought that if we just had more stuff, things would be better—that money can buy us happiness. It is easy to think that things would be better if we had a bigger house, a fancier car, a bigger budget for gourmet food, or more funds for luxurious travel.

That may actually be true to a large extent, but it is often the case that we do not have enough to spend the maximum amount we would like to on each of these, and even if we did, we may not have enough time. This is compounded by the fact that how much money we make is often (though not always) a function of the time we spend hard at work, at least initially.

There is also research that has shown that beyond a certain amount, there may be a drop-off in the amount of additional life satisfaction that we derive from more and more annual income.

Yet, we always find ourselves at least tempted to try to earn and spend our way to happiness, when an equally good, if not better, solution would be to think deeply about what matters most to us and direct our resources toward those things in a targeted and intentional way. It can even be helpful to go as far as to simplify our lifestyle, by significantly reducing time, energy and money spent on less important things, in favour of what truly counts.

When we judge financial products or wealth plans based on complexity.

Another situation where this bias can show up is when we are looking for good ways to invest our hard-earned money. The financial marketplace is filled with products of all kinds, and it is not easy to know what will work to help us achieve our goals.

At the level of the individual products, we see financial institutions continuously create new products to sell. They most often compete by adding new features or bundling existing products to turn them into new ones. This is not always a bad thing, but it is not surprising that this can result in complicated solutions with many pages of fine print that take time to explain, and that the customer may still not fully understand at the end of it.

And while it may seem like putting our money into something complex can buy us expertise, all-in-one solutions, or access to cutting-edge approaches that will pay off, this is often not the case. Complex products are usually more difficult to manage and distribute, and therefore may also end up costing significantly more while not necessarily being more effective.

It sometimes makes me wonder whether such instruments continue to be birthed as a result of a creation process that is strongly ruled by the notion that added complexity is better.

At a broader level, this can also find its way into our individual approaches to planning for our wealth. When we seek out advice or a way to do it ourselves, it can be tempting to choose what we may perceive to be a high level of sophistication.

We may feel drawn to continuously add more and more different products to our portfolios instead of taking time to review what we have in a totality and making educated decisions about how to streamline our overall plan to work the way that we want. The sales pressure that is often applied when we are considering these products does not help either.

When choosing an adviser, it can also be easy for us to look at our options and feel that we should choose the one that pitches “sexy” products with all the bells and whistles, the one that employs a complicated analysis of the markets, or a supposedly beyond-genius-level algorithmic approach taking into account every minute detail, when perhaps our goals may be better served by an approach that is only as complex as it needs to be.

Finding the right solution, in terms of complexity.

A right solution is one that works well—it is as simple as that. What works well, however, really depends on what you want to achieve. It depends on your goals, your current financial setup, your level of technical understanding and your risk profile. It should be sophisticated enough such that it does not leave out any essential moving part, but simple enough that it is easily understood, executed, and followed.

What this means, of course, is that while it is usually good to keep things simple where we can, complexity can sometimes be necessary and even good.

If your goals require the consideration of a multitude of essential moving parts then something more complex might be needed to address them; but if the dreams you have for your wealth are less complicated, then that may not be the case.

The trick is really figuring out how much complexity we actually need to add to our wealth plans to be effective in achieving our most important goals.

To that end, our Solutions, Investment and Advisory teams work closely with one another and spare no effort in developing our solutions, selecting appropriate instruments, and incorporating the result into our clients’ wealth plans—and all in a way that ensures we constantly review and improve them, regardless of whether it means we have to add, remove or change elements along the way.

Something that struck me about Adams and colleagues’ study is that the additive bias could possibly be avoided or reduced with the help of a professional wealth adviser. Sharing the load with a team of professionals whose main job functions are to help you make good wealth decisions can alleviate the problem of having a lack of mental space, or time, to consider what your best options are.

This is an original article written by Bryan Chan, Associate Adviser at Providend, Singapore’s First Fee-Only Wealth Advisory Firm.

For more related resources, check out:
1. Episode 3: Starting Your Own Wealth Plan
2. The Heart of the Matter Is the Matter of the Heart
3. Sailing and Wealth Planning: When It Is Smart to Play It Safe

We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current estate plan, investment portfolio, financial and/or retirement plan, make an appointment with us today.

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