This fabulous simple graphic from Jessica Hagy, courtesy of http://flowingdata.com, has initiated some very interesting discussion, both serious and humorous.

First, yours truly attempted some further illustration and logical discussion. This led to what follows.

**My Logic**

As we collect information we quickly think we understand a thing and confusion goes to a minimum. After we get to a certain point, additional information tends to:

(1) Create overload;

(2) Start to accumulate contradictions;

(3) Suffer from loss of memory of information obtained early on.

This situation can be improved by keeping records and organizing the information. This results in a lessening of the rate at which confusion drops due to the distraction of the organization process. Because all the information remains more visible through organization, we never reach the low level of confusion of the first graph because selective filtering does not occur. This filtering allows the illusion of understanding by the selective use of information. But again this process reaches a minimum point in confusion, but not as low a level. When confusion starts to turn up due to information overload, organization keeps it from rising as quickly.

If we add analysis to the organized data, the drop in confusion is even slower as early on the data is too meager to give confidence to analytical results. The minimum in confusion comes later in this case, and at a higher level, because analysis tends to highlight what is not known quite effectively. As time and amount of information increase, more things become defined but never to the extent that they can completely overcome the increase in the unknowns discovered.

A summary of what I am saying would be that the more we know, in general, the more we discover we don’t know. Organization and analysis can reduce the confusion resulting from information overload, but will add to the identification of what is not known. Confusion with increasing information may go through a minimum, but the infinity of the unknown will never allow confusion to go below some preliminary low level and will force it to go higher.

The one exception comes with what we call breakthroughs. When Newton formulates the laws of motion or Schrodinger defines the wave equation or Crick and Watson discover the DNA helix, discontinuities occur where confusion drops spectacularly. But that drop is temporary and all the new frontiers opened up quickly expand the unknown. Confusion returns.

**Guest Commentary**

Next, when this was posted on my Seeking Alpha Instablog (link provided at end of this article) some very good comments were written. One is particularly humorous, and, at the same time, very insightful. It is written by a commenter known only to me as “Albertarocks”, a pseudonym. Here is what “Alberta…” had to say:

Ok, here’s a take from a guy who’s studied technical analysis for decades.

These charts are clearly a mirror into the human psyche. Although these masterpieces aren’t necessarily stunning in their complexity, they are indeed mind boggling in their revelations. At this point in time, there are more than 345 conclusions that can drawn, but I’ll try to narrow them down as much as possible in the short time allotted.

Ok, let’s get to work:

First of all, with no organization added to the available information, it is apparent that a person who has absolutely no information, known in most circles as “the dolt”, will perform exactly as well as the individual who has all the information. This type of personality is commonly referred to as the “know it all”. This phenomenon has been proven to be factual time after time, in various and numerous occupations throughout the lands and millennia.

A prime example of where this phenomenon is commonly encountered in the modern era is in the realm of stock market investing. It has been proven over many decades, and indisputably so, that a pairing of two individuals, the common “know it all” and the average every day “dolt”, will invariably result is a nearly identical financial performance through the course of a solitary calendar year. In most cases this has been proven to be a negative number for both individuals, although not necessarily so.

Strangely enough, in some pairings, their success can be measured in the hundreds of thousands of dollars to the plus side. However, with the given data, when we encounter an individual who boisterously reports that he has earned $250,000 in the past 10 months, we can not yet conclude whether he is a “know it all” or a common “dolt”, but we can assume he is one or the other. How do we come to that conclusion? By observing that he has dollar bills hanging out of his pockets and that his shoelace is untied, we know that he has not yet discovered organization.

By the process of elimination, and having surmised that the individual has not yet discovered organization, we can surmise conclusively that whichever category this individual would best fit into, we do know that he is totally confused.

Now, it is entirely possible, using the data gleaned from the charts, to discern whether or not an individual could possibly be a somewhat organized dolt or a completely disorganized know it all. However in order to gather that information, we would need to apply a MACD to the “confusion/information’ trendline. For that we would need the necessary numerical data inputs. However at the time of this writing, that data is unavailable.

It has also been shown that without any organization, many individuals show characteristics of both persona… somewhat akin to a hermaphroditic plant. This persona type is more commonly referred to as a “know it all fuckin’ dolt”. This type is found more often than would be expected in the profession of business journalism.

These charts also show, remarkably, that there is a point of optimum performance in the “confusion” aspect. That optimum invariably occurs when the individual has little or no information. A type of mindless nirvana, a form of complete bliss where the individual knows nothing and is not confused in any manner. They know nothing, yet have all the answers because they are not confused. These are what we call “teenagers”.

Due to limitations beyond my control, this analysis will now come to a conclusion. Given more time and space, it would indeed be fun to share with you the more incredible assumptions that can be drawn from these graphic presentations. Next time, we’ll go into the methods of discerning an individual’s place of birth and mother’s maiden name.

Until then……..

Oct 24 02:17 AM

Link to Instablog post and all comments: Information Overload

November 25, 2009 at 12:04 am |

Hi John, I was having a look at what was better renting or owning a house and I came across your analysis.

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You raise the savings issue as an advantage of owning. It is a forced savings plan for many who would not otherwise save. Of course, it is a savings plan with a negative return for those who bought in the last 5-6 years. But many who have owned their home for 10-20 years have a good return on their down payment at current prices, even taking carrying costs (insurance, maintenance, property taxes and mortgage interest) into account.

A hypothetical sample: House purchased in 1990 for $100,000 with $20,000 down and worth $200,000 today. Assume property taxes at 1% of market value, homeowners insurance and maintenance costs of 1% of purchase price, and accumulated total mortage interest of $50,000. The property taxes and mortgage interest are assumed to included savings from itemized income tax deductions. Also assume equivalent rent over this period averaged $500 per month.

The 18 year totals: $27,000 property taxes, $18,000 HO and maintenance, and mortgage interest $50,000 are expenses. This totals $95,000.

The savings in rent over 18 years is $108,000. Thus we have spent $95,000 and saved $108,000, or a net plus of $7,000.

Let’s assume the buyer took out a 30 year mortgage and has not tapped home equity. The current principal due is around $40,000. Thus the current equity position is $7,000 plus $160,000. Therefore, the original $20,000 could be considered to have a value of $167,000. This is an internal rate of return (annual average) of 12.5%. If home values drop another 20%, the average internal rate of return drops to 10.8% per year. These rates of return are essentially free of income tax.

Now let’s look at how the renter could get to the same net equity position ($167,000). For calculation simplicity, let’s assume that the $95,000 spent on the trappings of home ownership was saved in equal installments for the 18 years, or approximately $5,280 per year. We start with an investment of $20,000 and add $5,280 per year. We will have $167,000 after 18 years if the after-tax internal rate of return is approximately 4% a year. If the after-tax return averages 5% a year, the renter has approximately $200,000. This is close to the average annual rate of return for the S5P 500 (including dividends) for all but the top tax brackets.

So the renter has a slight advanyage over the home owner if the money saved by renting is invested.

As I pointed out in a preceding comment, most do not save available cash, but spend it. You said: “With a house of your own, you are forced to save, and that is a good thing.” For many people, I agree.

But don’t forget timing. The savings vs. renting calculations for people who bought 2004-2007 will not favor the buyers in any way for many, many years.

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I’m a little confused by the numbers though. Specifically you state that on a 30 year mortgage the principle remaining is around $40,000. So doesn’t that mean the home owner has payed around $40,000 in principle of the $100,000 loan and $50,000 in interest?

So wouldn’t that mean over the 18 year period the homeowner has actually payed $95,000 (costs + interest) + $40,000 (principle) = $135,000 and the renter has payed $108,000.

Thus wouldn’t the renter have had an extra $27,000 that they could have saved?

November 25, 2009 at 12:53 am |

Your calculation is correct. I left out the $40,000 in payments against principal. So that means the home owner has paid out $27,000 more than the renter after 18 years, as you stated.

After 18 years, the home owner has a net equity position in his house of $160,000 and has paid $135,000 to establish that, for a net position of +$25,000. He started with $20,000 down, so the total improvement in equity for 18 years of home ownership is only $5,000.

The renter has paid over 18 years $27,000 less than the home owner, or an average of $1,500 per year. If that were invested with an average annual return (after-tax) of 4%, the total after 18 years would be $27,780. If the renter had invested the $20,000 that would have been the down payment at 4% (again after-tax) for 18 years, that would grow to $40,000. This means the renter would have an equity position after 18 years of $67,780 or a gain of $47,780 on the original $20,000. This is more than 9x the equity position gain of the home owner.

In this example, as corrected here, the renter is not slightly ahead, he (she) is way ahead. Other examples would yield different results. In making your own case study you must be aware of your own savings discipline. Many people who have enough discipline to make mortgage payments do not have the discipline to manage more liquid investments wisely and to make regular savings payments.

Finally, stability of income is another consideration. As many have found out in the past couple of years, it is possible to go from what appears to be secure employment to an extended period of unemployment in just a few months. Not having a mortgage makes adjustment ot extended unemployment more manageable.