functions to send many investors outside their comfort zone. Complexity
can cause confusion but it is not confusion. Complex investments understood
are satisfying for some investors. Most investors, though, prefer simple
investments. They have enough complexity in their lives already. Complexity
requires work to understand and exploit. Most investors are not looking
for mind-twisting experiences.
Complexity comes in three main forms: mathematical, conceptual, and
tax related. Some investors are comfortable with mathematical complexity
but not conceptual complexity and vice versa. Option strategies involve
mathematical complexity. A wide range of calculations must be made to
determine the potential outcomes and to hedge each outcome. A salesperson,
used to bantering about ideas while the home office calculates profits,
may be out of his comfort zone in options. He may, however, enjoy venture
capital.
Venture capital requires a wide grasp of ideas and concepts. To determine
if gizmo A is a good investment you have to know:
* What it does and what is does not do.
* What other gizmos are currently available and what they do
and what they do not do.
* All the other gizmos being developed.
* What their prospects are.
* The prospects for the industry.
* The supply and demand conditions of the industry both
current and future.
* The financial aspect of all the variables.
An accountant may be out of her comfort zone in venture capital. Her
brain may simply not twist around enough ideas to make a good judgment.
Tax complexity is too much for even experienced investors comfortable
with both mathematics and concepts. Mathematics has logic. Ideas tell
a story. Tax complexity is complete nonsense. For example, the rules for
withdrawal from tax-deferred retirement accounts are extremely difficult
to understand. 401(k) tax complexity is beyond the comfort zone of most
investors, yet few realize this.
Read More : Complexity In Trading
