AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
Occam’s Razor, a principle conceived in the middle ages by a philosopher named William of Ockham, basically states that when given two opposing hypotheses, theories, or explanations the simpler one always prevails.
But why? Why is the simpler one better? Let’s break down the logic.
Hypotheses, theories, and explanations are nothing more than one’s interpretation and perception of the world around him. They are not fact. They are not the holy grail and they certainly are not the keys to the kingdom. A theory is only as good as its ability to be tested. Remember, in a hustler’s mindset, we don’t care if the explanation is “right” or not, we just want to know if it will pay us, ‘nuff said.
Simpler explanations are preferable to more complex ones because they are more testable.
A complex theory is usually one that started from a place of simplicity, but then failed in some capacity. Instead of tossing the explanation, more ad hoc hypotheses are added to prevent falsification.
To recap, we like simpler because it is easier to test and evaluate. The quicker and easier we can test and evaluate, the faster we can determine what is putting cash in our bank account and what is best saved for winning over the table at the next dinner party.
By Fred the Oyster – Own work, CC BY-SA 3.0, Link