I started working at Seek since past few weeks. I saw some posters from the User interface designer team that really caught my attention. I started wondering if many of these principles can be applied to other domains. A little big of digging and i found Laws of User Interface design on web.
Laws of UX is a collection of the maxims and principles that designers can consider when building user interfaces. It was created by Jon Yablonski. The maxims are illustrated beautifully and you can see them here
I started thinking if many of these principles can be applicable to investing.
Parkinson’s law is the adage that
“work expands so as to fill the time available for its completion”.
When applied to personal finance, Parkinson’s law states that expenses always match income. This implies that when income increases, expenses always increase to the same level as income.
One of the reasons why Parkinson’s law sets in is because of our consumer driven world. The latest phone or cars are constantly advertised and they make us feel, if we don’t have latest this or that, then we are missing out.
We should not allow Parkinson’s law to take place in our lives is because it prevents us from building an investment portfolio. We often feel there will always be time to save, but that may not be the case.
Occam’s razor principle states that if there are multiple competing hypothesis, the one with fewest assumptions should be selected. In other words, simpler is usually better.
Another interesting way to explain Occam’s razor is through one of its humorous (but equally valid) offshoots called Hanlon’s Razor:
Never attribute to malice what can be explained by incompetence or stupidity.
It’s also applicable to our finances and investments. Complexity doesn’t necessarily result in higher investment returns.
Investment analysis often require numerous assumptions. The greater the complexity, larger the dispersion of possible outcomes. We should avoid too much complication in our investing decisions. Some examples are :
- Diworsification : If you can achieve your asset and sector allocation goals with a handful of stocks, you should not complicate things by owning too many different shares or instruments.
- Buy/Hold/Sell decisions : One should resist the temptation to sell a share on every bad news. Similarly shares that do very well in certain circumstances should be avoided. Those circumstances may not arise again for many years.
This is a popular principle which states that :
80% of the effects come from 20% of the events.
This principle is widely applicable to investing also :
- 20% of our best stocks will probably generate 80% of our overall profit.
- 20% of the time we spent doing research usually generates 80% of the most useful information
- 80% of the time we spent doing research is likely not very productive.
Von Restoraff Effect
Something that stands out is more likely to be remembered. So a highlighted item on the list is more likely to be remembered than the remainder of the list.
People will tend to invest in stocks they remember because they’re either popular or they’ve been recently in the news. In essence we’re biased in favor of remembering the unusual. Unfortunately relying on our memories to recall possible investment targets isn’t really a very sensible approach.
Tesler’s Law, also known as the Law of Conservation of Complexity, states that for any system there is a certain amount of complexity which cannot be reduced.
The law of conservation of energy states that total energy of an isolated system remains constant, it cannot be created nor destroyed. Instead, energy transforms from one form to another. Similarly there must be a law of conservation of complexity.
Based on that, one way to describe simplicity is being devoid of unnecessary complexity.
All companies considered for investment have an inherent amount of irreducible complexity. The complexity can be due many factors like company structure, holding companies, subsidiaries, acquisitions, other investments etc.
An investor can only make things simple to understand to an extent. Making things too simple beyond a point lead to make many assumptions that can have undesirable effects.