The world has become too complex and while some thrive on making life complicated, most of us prefer simplicity. That’s where ontological parsimony comes into play. A brief explanation is in order in the unlikely event a few of our highly intelligent readers are unfamiliar with the term. Ontological parsimony is often equated to Occam’s razor (or Ockham’s razor), named after William of Ockham, a 14th century logician and friar. It is a rule of thumb that states that among competing hypotheses, the one with the fewest assumptions should be selected. There may be an extremely large, perhaps even incomprehensible number of possible and more complex alternatives, because one can always burden failing explanations with ad hoc hypotheses to prevent them from being falsified. Therefore, simpler theories are preferable to more complex ones because they are more testable.
There have been very few discussions of ways to apply ontological parsimony to the investment and financial planning arenas. That’s too bad, because we stand to benefit from a loose interpretation of this otherwise complex rule of thumb, i.e., prefer simpler financial products and services over those that are more complex. Heaven knows that innumerable convoluted products have been and will continue to be foisted on consumers, usually to their detriment. More often than not, the less complex choice ends up producing as good if not better results. Here are some examples:
- Index funds have shown to produce higher long-term investment returns than most actively managed funds. With few exceptions, garden variety actively managed funds, which utilize all manner of complicated investment strategies, do not perform as well as index mutual funds and exchange traded funds that are designed simply to replicate the performance of a particular stock or bond index.
- Whole life insurance or annually renewable term insurance. The life insurance industry is regularly introducing new forms of coverage that sound enticing but end up falling short of the hype. Consumers are probably better off with old-fashioned forms of life insurance, notably whole life insurance that builds cash values or annually renewable term insurance that pays off only in the event of the insured’s death. Other forms of “new and improved” life insurance coverage may be new but are unlikely improved.
- Income annuities. Income annuities can be a valuable source of lifetime income for retirees, and the annuity companies are trying to differentiate themselves by introducing newfangled variations on the basic product. Most notably, index annuities are the rage and I defy anyone who has bought one to explain how they work, and the risks involved.
- Estate planning is rife with opportunities to undertake (unfortunate pun not intended) strategies that are more complicated than necessary or are unnecessary. Living trusts come to mind as do attempts at controlling one’s estate long after one’s demise. While these may be useful, if not essential for some, they are of little value for others compared with a straightforward will, unembellished with trusts.
In the context of your own financial decisions, the best approach is to stick with old-fashioned, plain-vanilla financial products that you understand. My guess is that if William of Ockham were alive today, he would most certainly do so. If someone who is trying to sell you an investment or other financial product can’t describe it to your satisfaction in one sentence, don’t buy it. Keep it simple.
Smart Money Tips
- Quit playing the lottery. States boast of how much money they raise on the lottery. This is hardly something to be proud of. If you want to spend a couple of bucks a week, that’s fine, but there are a lot of people who are sacrificing their future financial security on the slim hope that they’ll somehow win the lottery. They’re usually in front of me in the convenience store checkout line. But ultimately, you’re going to lose a lot of money which could have been put to much better use later in life.
- Think before you enroll. Don’t fall for the common practice of signing up for various memberships, like health clubs, software subscriptions, and online and print publications for free or at a low initial cost only to find out that the provider keeps charging your credit card long after you have ceased using the membership or service. It’s better to sign up for a short period of time to see if you want to continue indefinitely. Also, check your credit card bills to make sure you’re not being charged for services you no longer use.
Jonathan will be interviewed on NPR station WOSU from 10 to noon this Friday, September 23. Just visit WOSU.org and go to “Listen Live”
Food for Thought
No Rose without a Prickle
No Sweet without some Sweat
Gnomonologia: Adagies and Proverbs; Wise Sentences and Witty Sayings, Ancient and Modern, Foreign and British; London, 1732
Money Can Be Funny
If you think no one cares if you’re alive, try missing a couple of car payments.
Word of the Week
deipnosophist (dyp-NOS-uh-fist) noun – someone who is skilled in table talk.
Origin: From the title of a work written by the Greek Athenaeus in about 228 AD, Deipnosophistai, in which a number of wise men sit at a dinner table and discuss a wide range of topics. It is derived from deipnon, “dinner” + sophistas, “a clever or wise man.”
He was quite the deipnosophist; he socialized beautifully at the dinner and impressed all the guests in attendance with his knowledge of ancient Near Eastern dining rituals.