Probabilistic weights from the past may be a fragile guide to the future. Weighting may be in vain. Strategies that simplify, or perhaps even ignore, statistical weights may be preferable. The simplest imaginable such scheme would be equal-weighting or “tallying”. Gigerenzer and Brighton (2009). 7 In complex environments, tallying strategies have been found to be superior to risk-weighted alternatives. Take avalanche prediction. Avalanches are difficult to predict, as they are drawn from a fat-tailed (Power Law) distribution. Yet simple tallying of a small number of avalanche indicators has been found capable of predicting over 90% of historical accidents. It has also been found to be superior to more complex decision methods (McCammon and Hägeli (2007)). A similar finding has emerged from studies of asset prices. They too are drawn from a fat-tailed distribution. When investing across N assets, the Merton-Markowitz portfolio strategy would weight by risk and return. A far simpler strategy would equally-weight all assets – a 1/N rule. In out-of-sample trials, the 1/N rule outperforms complex optimising alternatives, including Merton-Markowitz (DeMiguel et al (2007)). Indeed, Markowitz himself pursued a 1/N, rather than Markowitz, strategy when investing for retirement. (d)  Small samples and simple rules  The choice of optimal decision-making strategy depends importantly on the degree of uncertainty about the environment – in statistical terms, model uncertainty. A key factor determining that uncertainty is the length of the sample over which the model is estimated.

Like disease detection, frisbee catching, sports prediction and stock-picking, living a moral life is a complex task. The Ten Commandments are heuristics to help guide people through that moral maze, the ultimate simple rules. They have proven remarkably robust through the millennia. Less has been more. (3)  Finance – more is more? The response to the financial crisis by banks and regulators has been swift and sizeable. Gaps in risk management have been filled, deficiencies in regulation plugged, errors by regulators corrected. This is a self-healing and familiar response. Past crises have also been met by a combination of more risk management, more regulation and more regulators. More has been more. (a)  The Tower of Basel  The foundations for today’s financial regulatory framework were laid in the 1980s. The Basel Accord of 1988 was a landmark. It was the first-ever genuinely international prudential regulatory agreement. For the first time in financial history, a minimum standard had been established for all internationally-active banks. Yet despite its breadth, the Basel I agreement was only 30 pages long. 8 This brevity came courtesy of focussing on a limited set of credit risks measured at a broad asset class, rather than individual exposure, level. Only five different risk weights were defined under Basel I, varying from zero to 100%. Calculating regulatory capital ratios was possible using pad and pen. In taking this simplified approach, the Basel Committee fully recognised its limitations. It was recognised that the role of regulatory rules was not to capture every raindrop.