The law of parsimony states:
"Entities should not be multiplied without necessity."
Building a foundation on sand
Importance of this theory:
1. Price Action InterpretationOne thing that we encounter frequently is that novice traders rely on a complex system of even more convoluted indicators. RSI, BB, Clouds, EMAs, and many others crowded into one crammed chart. If a different trader cannot interpret your chart/idea in less that 15 seconds, its probably too complex. The reason this pitfall is so detrimental to novice traders is because it creates a false sense of confidence, and weakens other crucial aspects of their trading.
2. Everyday life
This theory of parsimony is applicable to just about every niche within your life. Its more than just science and trading. The simplest explanation to events is likely the most probable. I'm going to use some examples that show the utilization of this theory in action, and the importance of it with minimizing the anxiety of pondering alternatives.
COVID-19 is a respiratory illness caused by a very small enveloped RNA Corona virus. There are a lot of different proposed etiologies to where this bug came from, and they are all more exorbitant then the last. I spend a lot of time on the internet, and there are a lot of different schools of thought concerning where it came from.. Divine intervention from higher powers. Chinese biological weapon. Government propaganda program. Anti-global warming agenda.. Instead of diving in with your emotional brain, take a step back. The simplest answer in this case is pure entropy, also called random chance. There was a wet market in China, and two different viruses coinfected the same animal. These two particles exchanges genetic information and now we have a novel corona virus. This is the simplest answer in this case, and in fact have been the cause behind many other global epidemics. Mass conspiracy isn't likely based on all of the assumptions required for it to be true.
You're driving home to your parents place for Chirstmas eve dinner. It is evening and you can't see very much. Much to your dismany, your tire pressure light comes on. As you pull over to the shoulder, possibilities run through your head.:
- Your tire was slashed when you refueled at the gas station.
- The mechanic did this on purpose for repeat business.
- You drove over a shard of glass.
Although these are possibilities, that does not mean they are all probabilities. What might be true is very different from what is likely true.
Focusing on the big picture:
There are many different ways that an individual could apply this theory in their own life. It could be beneficial and the person removes complex assumptions from their life. This individual would be relatively 'free' to explore and entertain different probabilities before deciding on what they decide is the most simple, and likely true explanation. The other way to apply this theory can be detrimental to the individual. In this case, Occam's Razer is applied so meticulously that they don't accept any assumptions and rely on themselves for everything. Its in these case where it is applied inter-personally (between people) that you can run into problems. Regardless of how you apply it, the important thing is that you are aware of it.