Doing Too Much

It was the worst moment in San Diego Chargers history, even worse than drafting Ryan Leaf (who, coincidentally, was released from prison this week).

On January 14, 2007 I was in the stands with my younger son watching as the Chargers (14-2 in the regular season and widely regarded as the league’s nest team) hosted the New England Patriots in the divisional round of the playoffs. The Chargers had been 8-0 at home, had five All-Pro players and had nine players elected to the Pro Bowl. The day before I had received a certified letter from the Bolts, advising me that I had won a lottery among season tickets holders and would thus be allowed to purchase Super Bowl tickets if (when!) the Chargers advanced there.

But the day didn’t turn out the way I had envisioned.

Marty Schottenheimer foolishly attempted to convert a 4^th and 11 at the New England 30 early in the game. The sure-handed Eric Parker muffed a punt, one of four turnovers in all. Drayton Florence head-butted a Patriots player and drew an unsportsmanlike conduct penalty to negate a fumble recovery for the home team. Lots went wrong, but the Chargers still had the lead late. The great LaDainian Tomlinson, who had rushed for 1,815 yards and 31 touchdowns that season, ran for 123 yards and two scores that afternoon and extended the lead to 21-13 via a touchdown run with 8:35 left in the 4^th quarter.

On the very next series, Tom Brady threw his third pick of the day. The game should have been over, but Marlon McCree tried to return the interception rather than falling to the ground while cradling the football. McCree was stripped of the ball (right); the Patriots recovered and went on to win. When the Pats proceeded to do the silly Shawne Merriman sack dance on the Chargers logo in the middle of the field after the game, it instigated a brawl.

After the game, McCree was unrepentant. “I was trying to make a play,” he said, “and anytime I get the ball I am going to try and score. …[In] hindsight I don’t regret it because I would never try and just go down on the [ground]. I want to score.”

It’s a football cliché, of course, but Marlon McCree simply tried to do too much. It happens in investing all the time too.

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Chaos is a friend of mine

Over 50 years ago, Edward Lorenz created an algorithmic computer weather model at MIT to try to provide accurate weather forecasts. During the winter of 1961, as recounted by James Gleick in Chaos: Making a New Science, Professor Lorenz was running a series of weather simulations using his computer model when he decided to repeat one of them over a longer time period. To save time (the computer and the model were primitive by today’s standards) he started the new run in the middle, typing in numbers from the first run for the initial conditions, assuming that the model would provide the same results as the prior run and then go on from there. Instead, the two weather trajectories diverged on completely separate paths.

After ruling out computer error, Lorenz realized that he had not entered the initial conditions for the second run exactly. His computer stored numbers to an accuracy of six decimal places but printed the results to three decimal places to save space. Lorenz had entered the rounded-off numbers for his second run starting point. Astonishingly, this tiny discrepancy altered the end results dramatically.

This finding (even using a highly simplified model and confirmed by further testing) allowed Lorenz to make the otherwise counterintuitive leap to the conclusion that highly complex systems are not ultimately predictable. This phenomenon (“sensitive dependence”) came to be called the “butterfly effect” because a butterfly flapping its wings in Brazil can set off a tornado in Texas. Lorenz built upon the work of late 19th century mathematician Henri Poincaré, who demonstrated that the movements of as few as three heavenly bodies are hopelessly complex to calculate, even though the underlying equations of motion seem simple.

Accordingly and at best, complex systems – from the weather to the markets – allow only for probabilistic forecasts with significant margins for error and often seemingly outlandish and hugely divergent potential outcomes.

The Tuned Market

My two-year old grandson loves his Legos.  As a kid, I loved my Legos. These colorful bricks seem to call to us to create elaborate and complex structures.  They don’t invite simple, clean lines. Sure, once in a while somebody (never a kid) makes a Lego Fenway Park or something like that, but crazy and complex is the norm (not that a Lego Fenway Park isn’t a different sort of crazy). That’s why they’re so much fun.

We love complexity.  It’s why it is so hard for us to employ Occam’s Razor.  We should of course go with the simpler explanation or approach unless and until something more complex offers greater explanatory power. But we don’t.  We want to include our pet political ideas, convoluted conspiracy theories or favored market narratives.  We are ideological through-and-through, and the more complex the better.