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The means of seduction – Simple is often better so try and resist the lure of investment ‘science’

22/10/2013

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

“Seductive allure” is not a phrase we get to use very often here on The Value Perspective – no matter how strongly we may feel about the attractions of value investing. An opportunity has arisen, however, after coming across an academic paper from 2008, The seductive allure of neuroscience explanations, which offers some insight into a particular behavioural finance trait.

Written by Deena Skolnick Weisberg, Frank C Keil, Joshua Goodstein, Elizabeth Rawson and Jeremy R Gray, the paper describes an experiment where US psychologists offered various groups of people four different explanations of a particular psychological condition – ‘good’ and ‘bad’ explanations couched in everyday language and ‘good’ and ‘bad’ explanations that were far more technical and contained a lot of neuroscience-related jargon.

Some of the groups were made up of experts in neuroscience while others were laymen taken off the street and, to cut a long paper short, the latter tended to rate any explanation that contained neuroscience jargon – whether it was ‘good’ or ‘bad’ – as considerably more persuasive than the more simply-phrased alternatives.

This result is consistent with findings by behavioural finance scientists that the human brain is more likely to accept what appears to be an informed and coherent explanation for something – regardless of how accurate the explanation is in reality. However, just because something sounds informed and coherent and based on sound logic or science does not mean it actually is and there is often a lot to be said for keeping things simple.

As the old saying goes, value investing may not be easy but it is simple and that simplicity stems from looking to buy cheap companies that are sensibly financed. Time and again, however, people find themselves dazzled and attracted by investment ‘science’ – by shiny new products that purport to be able to do lots of clever things on the back of complex algebra and other formulae.

Try to resist their ‘seductive allure’ – these products have often not been tested by time. In contrast value investing has been shown to yield impressive results over more than 100 years and, as a result, is more deserving of your confidence than the latest fad.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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