One popular idea in behavioral economics argues that the society we inhabit today is radically different from the simpler society our ancestors inhabited and that our environment has changed far more than our minds. We evolved most of our mental shortcuts for the ancestral environment, and while those shortcuts worked well in the past, today they cause us to make a variety of cognitive errors.
Bruce Charlton, a medical professor from Britain, argues that the opposite is true, at least for smart people. He claims that humans have two distinct ways of thinking: a set of instinctive behaviors to deal with the problems our ancestors regularly faced, and abstract intelligence to deal with novel problems. He further claims that smart people over-use abstract thinking as a way of solving problems, even when more instinctive, common-sense forms of problem-solving would work better.
In his own words:
[A]n increasing relative level of IQ brings with it a tendency differentially to over-use general intelligence in problem-solving, and to over-ride those instinctive and spontaneous forms of evolved behaviour which could be termed common sense. Preferential use of abstract analysis is often useful when dealing with the many evolutionary novelties to be found in modernizing societies; but is not usually useful for dealing with social and psychological problems for which humans have evolved ‘domain-specific’ adaptive behaviours.
Charlton has coined the term "clever sillies" to describe intelligent people who overuse abstract intelligence to the detriment of common sense.
I find his idea very interesting. I'm sure the behavioral economists are right that many of our instincts have become maladaptive, but there definitely are smart people who let the pendulum swing in the other direction and think in an overly abstract way. To some extent, they're just putting a premium on what they do well. If your common sense is no better than anyone else's but you're great at interpreting abstract patterns, why wouldn't you default to the latter?
Off the top of my head, I can think of several things that seem like a product of "clever silliness":
• Many ideas from academic finance, e.g. cost of capital
• Many hedges that are intellectually elegant but prone to failure
• The fact that VIC write-ups describing complex or unique investments tend to get better ratings than the ones describing simpler, more straightforward investments.
• "Portable alpha" and similar concepts
...I'm sure there are many more.
Modern finance does have a lot of novelty and does require a lot of abstract thinking, so clever sillies aren't totally wrong. Instead, they're using a skill that's essential to investing but over-applying it. I've dissed Buffett a lot here, but his quote about degree of difficulty is on the mark:
Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterized by many constantly shifting and complex variables.