The thinking fallacy

Via Norm, I discover Nigel Warburton's excellent blog. Here, he makes passing reference to an important error - "the informal fallacy of assuming that more prolonged thought = better results (the Protestant Work Ethic Fallacy?)"
This fallacy deserves much more attention that it gets. There are, I suspect, three bases to it:
1. Quick judgments can often work well, as Malcolm Gladwell and Gerd Gigerenzer (pdf) argue. Our cognitive processes evolved at a time when primitive people needed snap judgments to stay alive - to avoid being hunted.
2. Thinking and gathering information not only expose us to the possibility of countless errors, but increase our chances of making two particular mistakes.  One is overconfidence. If we've gathered lots of information, we can easily have more faith in our judgments than we should. The other is the fallacy of correlated observations; if we hear lots of evidence for a proposition, we might overestimate the validity of the proposition if we under-estimate the extent to which the evidence is correlated. For example, it's easy for policy-makers to over-estimate the danger of inflation, because reports of inflationary pressures are highly correlated.
3. In one field, there's hard evidence which shows that thinking doesn't pay off - fund management. According to Trustnet figures, less than half of actively managed UK company unit trusts have beaten the 58.5% return on the best All-share tracker fund over the last five years; this is no mere quirk of these data - it seems a general fact that index funds usually beat active management. So, thinking full-time about which shares to buy is inferior to buying the market.
This has general implications, as stock-picking is one of the few fields of activity where we can directly compare the efficacy of thinking versus not thinking.
So, here's a theory. Being thoughtful is not so much a utilitarian, practical virtue so much as a moral one; it promotes excellence rather than effectiveness, to use MacIntyre's distinction. Thoughtfulness leads to liberalism and tolerance, even if it doesn't have narrower advantages. 

Comments

[Mark Wadsworth]

As a tax and welfare reform and simplification campaigner, I'm not so sure.

The government does all this little reviews of little special areas (welfare reform, state pension, local government funding, council housing) and although each team does tons of research, they completely miss the bigger picture. This is quite possibly a deliberate strategy by the government to preserve the status quo.

So this is one area where they should have done MORE thinking, or possibly less thinking but more JOINED UP thinking.

I have researched into all these areas and they are all interlinked and the answer to most of these (to the extent that the State can do anything about them) is actually dead simple
1. Citizen's Income-type welfare system
2. Flat tax (low rate, NO exemptions or loopholes) and
3. Land Value Tax

Get rid of everything else not mentioned on the above list.

[chris]

Doesn't this corroborate my point, Mark? Simple, low-thought policies are better than the tricksy complex ones Brown has come up with.
A basic income and flat tax require less thinking (by both policy-maker and subject) than our current arrangements.

[Mark Wadsworth]

I would like to think it supports your point in a roundabout way.

But then again, I worry that I suffering from overconfidence.

Perhaps I and countless others are completely wrong. Perhaps what this country really needs is even more means testing, more quangos, more tax reliefs and higher tax rates and hideously complicated tax, welfare and pensions systems.

[dsquared]

[So, thinking full-time about which shares to buy is inferior to buying the market. ]

no, the benefits of thinking about which shares to but are fully captured by the people who actually do it; you would need to look at the ex-fees costs to establish the stronger conclusion.

[dsquared]

(also, are you really sure that it's possible to run an index tracker fund without a lot of thought? There appears to be a huge difference between the performance of the best and worst trackers over the last five years, and the Scottish Mutual tracker that you're citing seems to have a huge bid-offer spread if the data is right - this matters as the 58.5% figure has been calculated bid to bid.

[Mark Wadsworth]

Getting back to tracker funds, if you have a few quid to spare to buy shares, then buy a copy of the FT, pin the shares page to the wall and throw a few darts in it.

Even if your selection doesn't do quite as well as some clever manager's selection, you'll save a fortune in management charges that swallow up about half your dividend income, so all in all you'll come out ahead.

[Mark Wadsworth]

Whether or not some tracker funds or active managed funds do better on a bid-to-bid is neither here nor there.

You will always be better off buying shares in actual companies directly (even on a random basis). Fund managers swallow up half your dividend income in management charges, so you're already beating them by two percent a year.

[ChrisA]

Thinking more does improve performance in some areas, where the problem is resolvable by rational analysis. For instance in engineering, more rational analysis will (has) improved the performance of bridges for instance. But in many cases, and stock returns are one example, the problem cannot be analysed and resolved, there are two many variables and they interact in ways we don't understand. In the latter case a random approach (or your gut feeling which comes to the same thing)is less costly (as you don't spend time on analysis) and as accurate as thinking so superior. Of course the trick is to know what problems will benefit from rational analysis, and which ones will not. Sometimes you don't know until afterwards, or sometimes there are bias (seeing random success as rational success) which confuse people.

[potentilla]

Running a big tracker, especially one which aims to track very closely (they don't all) does indeed take a lot of thought. Keeping your inflows fully invested with a full-replication fund is hard. Also dealing with changes in the index in size.

Mark Wadsworth - it's not as simple as that. If you don't pick that many stocks, your total return will not correlate very highly with the market (which could of course be randomly good or bad). The closer you get to full diversification, the more you are likely to get stuffed by dealing etc costs (and quite probably purchase price).

No I am not a fund manager, I have just watched a lot of clever ones (and a lot of not-so-clever ones).

[Harry]

But surely Raquel and the others in 1000000 Years BC lived in a rather less complex world than we did where although snap decisions were a necessity ("Oh lordy here comes a dinosaur - best think quick")and one would have to accept by the very nature of living a million yeards BC there was far less substantial empirical or theoretical work on the dinosaur.

Snap decisions were all there was, not simply a choice, alongside reading "Teach Yourself Escape from Dinosaurs" or "Strategies for the use and misuse of the Spear in Dinosaur Escape", with the attendant danger of over thinking the subject and ultimately being eaten.

Also the size speed and aggressiveness of a predator may alter the desirability of decisions on the hoof. Just as an investment specialist is little better than a broken down semi drunken and literate gambler on the gee gees (just that the specialist gambles millions, not the children's shoe money), then the size and perhaps other less knowable (and in 1000000 BC unquantifiable) problems such as intelligence of the aggressor or the human (just as investing in copper futures may be risky if an unknown huge ore find occurs after pension funds have been signed away) may be altered if the gambler simply "pins the tail on the donkey" and gambles on the first pretty horsey he likes.
The ludicrous nature of investment in the western countries means that half arsed wide boys operating on a hunch throw billions of pounds/dollars away each year, because if he over thinks anything he may miss out on the massive profit on Moonbeam futures or Fairy Dust Inc. shares.The very last thing anyone needs in complex societies is people gambling with others lives and livelihoods.