Shaving Reality with Occam’s Razor

Ockham is a tiny village nestled in the richly wooded Surrey countryside. It boasts a medieval church, a green and a lovely gastropub, The Black Swan.

It is also the birthplace of one of the most glittering minds in medieval Europe.

William of Ockham (or “Occam”) was an illustrious fourteenth century scholar, shining like a comet in the dark and turbulent night of the Middle Ages.

His greatest contribution was the concept of Occam’s razor, considered to be foundation of modern scientific reasoning. He stated that when you are faced with different explanations, the one that makes the fewest assumptions should always be selected. In lay terms, the simplest explanation is always the best. For example, convoluted conspiracy theories are rarely true, whereas blatant mistakes are all too common.

Simplicity and clarity provide power. Excessive complexity proved to be at least one cause of the 2008 global financial crisis, as neither regulators nor practitioners truly understood the exotic universe of credit derivatives they had conjured into being. We look back today at the alphabet soup of ABS, ABCP, RMBS, CMBS, and eventually CDOs, CDOs-squared and CDOs-cubed – derivatives upon derivatives, ascending on a stairway to immaculate conceptual abstraction but economic implosion. 

Occam’s Razor reminds us that perfection is attained when nothing more can be taken away. Many experts lose themselves in jargon, whereas the best solutions are almost always the simplest. This insight is the foundation of what lean professionals call “poka-yoke” solutions – simple fixes that can error-proof an entire system. The childproof safety cap on a box of aspirin is a good example of this. Keep it simple. You don’t need a full factorial Minitab analysis of sleep and traffic patterns to get to work on time. Just set two alarms on your phone.

The pub’s name is equally intriguing. The black swan has recently passed into common market parlance, thanks to the iconoclastic investor Nassim Nicholas Taleb. It is an icon and metaphor for perceived impossibility that dates back to Roman times. Occam himself would have been well versed with the idea that because one swan is white, and all historic observations confirm this, therefore every swan that exists must be white. 

This logic was duly detonated for Europeans when Dutch ships reached Western Australia and encountered black swans with red beaks on what is now the Swan River. Rare and extraordinary tail-risk events that disrupt all a priori facts always occur. Never be too comfortable in your assumptions. People often feel safest just before the tsunami strikes. 

There are echoes of the financial crisis here too. The Value-At-Risk models employed by Wall Street up to 2007 relied on reams on historical data regarding losses and delinquencies on US mortgage receivables. There had been no sustained national decline in US house prices since the Second World War; hence the existing data set regarded such an event as a impossibility. Unfortunately, the irrefutable fact of annual growth was only true until one day it wasn’t, and then the black swan came into land.

Occam’s Razor is an essential reminder that our mental shortcuts can help frame our perception of reality – sometimes to tragic affect. To extend the avian metaphor, your mind is the goose that can lay the golden egg. Consider its assumptions and capabilities carefully. What treasures might it bring forth?

Something worth mulling over a beverage in this picturesque Surrey village.

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© Paul Darroch Groden 2024.


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