More on the theme of intentional complexity.
Many of the products we buy today are, by their nature, complicated. If you want to buy a television or a car or a computer, you are faced with a bewildering range of types, sizes and optional features.
Such complexity means some consumers will inevitably pay more than they need because they make mistakes or do not take the time to understand the options. Some complexity is unavoidable, but much of the complexity consumers experience is not.
For its consumers, energy is the simplest of products. All electricity or gas on the public network is the same. The only material difference between providers is the length of time it takes them to respond to complaints about your bill. The only persuasive claim a salesman can make is that his electricity or gas is cheaper. The time he spends trying to persuade you of this is a clue that it probably isn’t. But to establish the truth may require a computer.
Much complexity has been deliberately created, to encourage consumers to pay more than they need, or expected. Or to reduce the likelihood that they will switch to another supplier. …
The problem is less the weakness of competition than its effectiveness. Whatever one supplier does, others are forced to follow if they are to protect their markets and their returns. I
“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”
— F. Scott Fitzgerald
John Kay, with an insightful piece in the Financial Times (available for free on his blog) commenting on the narrative fallacy.
We do not often, or easily, think in terms of probabilities, because there are not many situations in which this style of thinking is useful. Probability theory is a marvellous tool for games of chance – such as spinning a roulette wheel. The structure of the problem is comprehensively defined by the rules of the game. The set of outcomes is well defined and bounded, and we will soon know which outcome has occurred. But most of the problems we face in the business and financial worlds – or in our personal lives – are not like that. The rules are ill-defined, the range of outcomes is wider than we can easily imagine and often we do not fully comprehend what has happened even after the event. The real world is characterised by radical uncertainty – the things we do not know that we do not know.
We deal with that world by constructing simplifying narratives. We do this not because we are stupid, or irrational, or have forgotten probability 101, but because story-telling is the best means of making sense of complexity. The test of these narratives is whether they are believable.
And this part, which reminds me of Nassim Taleb’s comments:
The rise of quantitative finance has led people to squeeze many things into the framework of probability. The invention of subjective or personal probabilities proved to be a means of applying a well-established branch of mathematics to a new range of problems. This approach had the appearance of science, and enabled young turks to marginalise the war stories of innumerate old fogies. The old fogies may have known something after all, however.