Analysis Paralysis

by Mike Holman

I’ve been reading the book “The Paradox of Choice” by Barry Schwartz which is an essay looking at the problems of having too much choice. It’s not a bad book although how he stretches his central idea into an entire book is beyond me.

Some of the ideas he talks about are similar to some decision making ideas that I’ve thought about so I thought I would share them with you in the contexts that I came across them.

Buying a house

Most people have a hard time deciding on a house to buy because there are a lot of different choices to make and there are so many differences between even the most similar of houses, it can be really hard to evaluate if you are getting good value for your money or if any particular house is what you really want.

I think one of the best strategies to deal with this is to forget about buying the “best” house and instead focus on avoiding the worst houses.

When I bought my first house I had no idea what I was looking for and what I wanted – and the fact is, it took me several years of living in that house before I had a clear idea of things that I like and don’t like in a house. This was further complicated by the fact that sometimes things change after you buy a house. Ie in my case I bought a house with a small yard and then developed a passion for gardening.

The fact is that of all the houses I looked at, almost all of them would have been suitable choices for me and I would have been equally happy in all of them. Out of ten houses, if you choose the fifth best house – you will never know what it would have been like to live in any of the four “better” houses so they don’t really matter once you make the decision to buy. The poor decision houses would have involved a lot of renovation work which I wouldn’t have handled very well and a higher price tag which also would have been a mistake.

Bottom line is when choosing a house (or car or vacation etc) – focus on spending a reasonable amount of time on a good choice and avoid the bad choices. Endless dithering to try to get the “best” choice will result in paralysis or a rationalization to spend more than you can afford on the basis that something that is more expensive must be better.

Asset Allocation

Regular readers of this blog will know that I have a big interest in asset allocation with respect to investments. I like reading books about it, reading blogs, talking about it, dreaming about it (at work) with the end result that I ended up spending too much time analyzing something that doesn’t necessarily need a lot of analyzing. In fact the more I read, the more indecisive I got because every new piece of information seemed to contradict and be better than the old information. So what did I do? Simplify!!!

Instead of worrying about whether I should have 5%, 10% or 20% REIT allocation I decided to not buy any at all. I should say that the main reason I did this is because REITs have done so well over the last few years that I didn’t want to buy at an all-time high. Emerging market is another one – it’s been going crazy for the last few years and again, instead of worrying about if it would crash if I bought it – I didn’t buy any. You could argue that this strategy is more of a “head in the sand” avoidance strategy and there is nothing smart about it and I wouldn’t disagree with you. The reason that it worked for me is that I was able to put a simple asset allocation together that I was happy with and I can add in more parts (REITs, emerging markets) later on.

There are plenty of other examples of where too much choice can impair our investment decisions – ever count how many mutual funds and stocks there are? Pension choices are another black hole for a lot of workers where instead of having to choose between one or two black holes..err.. pension choices, they get a slew of black holes to choose from which can result in a lot of them choosing by default to leave their investments in money market funds or the default pension plan which is usually the most conservative.

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{ 15 comments… read them below or add one }

1 Canadian Capitalist

You dream about asset allocation???? Dude, that’s just sick! :))

Sounds like a good book. I’ll see if our local library has it.

2 Four Pillars

CC – not ALL the time…

The book is not bad – some parts are interesting, some not.

Mike

3 fathersez

AP is a major sickness.

The same logic may be applied in lots and lost of other situations. Say, starting a part time business for one.

I know a colleague who analysed his way to apply for a job outside our organisation, and after going through all the interviews and tests, and securing the job, then analysed himself to stay!

And AP was the exact term he used…hehe

4 UpDog

Pillar, I agree to some extent that you can dither too much about financial decisions, but buying a house is more than a financial decision. It’s hugely emotional one too. Not many of us are unemotional enough to be satisfied with “the fifth best” house.
I was mortgage free in a perfectly satisfactory home, but I will never regret taking out a mortgage again to move to a house and neighbourhood I love. We nearly compromised on third and fourth best houses, but it would have been a huge mistake. If you can afford to love your home, you should.

5 Slim

All decisions are ‘bad’. The worst thing is taking time to make these bad choices.

Also, 80% of the markets gains from a bottom happen in 11 days. Choosing to ‘opt out’ of stocks because of fear is the #1 reason why retail investors make 3% (average) while the market averages almost triple the gains.

Retail buys high and sells low. Perfect example of this psychology here!

6 Silicon Prairie

The choices for asset allocation can be reduced a lot. Even something that’s still relatively limited like the canadian ETF market has too many choices for a regular investor. But if you really look at the returns for each one, some of them are completely unnecessary because there’s better choices. I like the way Unconvential Success describes this – for example, corporate bonds aren’t necessary because they have a higher risk and don’t offer enough additional return over government bonds. If you look at the choices available to you carefully you might find that a lot of them are actually worse than another comparable choice so they can be ignored safely.

Even if emerging markets continue to do well before I get to that part of my portfolio I think I’ll add them as a small percentage. That way the risk is minimal but if they continue to go up I can generate some extra returns and move them to other investments. When they do start to go down buying will look a lot better though!

7 Y HAT

I agree with the simplify approach. I even nicked named my portfolio the Keep It Simple Stupid RRSP.

8 Four Pillars

FS – good story. I think it’s a common term in project oriented workplaces.

Updog – interesting perspective. I guess my point with the houses is that you might not be able to determine the true order of the houses until you live there for a while.

SP – I’m waiting to buy emerging market if I ever do. One thing to keep in mind that a large part of corporate earnings in the US and Can. are from emerging markets so you probably already have some exposure.

Y HAT – simplification is a good thing.

9 Brip Blap

I’ve gotta go with Updog. Buying a primary residence isn’t an emotionless investing decision, it’s emotional and therefore needs to be “closer to perfect.” I’m with you on the other points, though – avoiding the worst case should be a higher priority than capturing the best case in investing, simply because you have a higher rate of sucess.

I bought tons of emerging markets a few years ago, incidentally, largely in the Chinese/Russian markets that my wife and I have studied and know pretty well – they’ve done quite well. And you make a great point, Mike – US and Canadian companies are already heavily invested in emerging markets, so we’re all probably touching the emerging markets already.

10 Four Pillars

BB – good call on the emerging markets…any more “hot tips”? :)

Mike

11 guinness416

I agree that buying a house is an emotional decision but couldn’t agree more with Mike that it’s almost impossible to be able to articulate properly “what you want/need” until after you’ve made that first home purchase and lived there for a while. We can’t be the only people to have had that experience, can we?

The other one that sprang immediately to my mind was health insurance (from the US perspective). I remember sitting in meetings every time they changed our insurance provider – which seemed to be annually – boggled by the differences in copays and coverage etc and essentially flipping a coin.

12 Four Pillars

Guinness – that was certainly my experience.

Funny thing is that I know a number of people who moved to different provinces and were able to buy a house on a visit. Never mind the fact that you don’t have time to learn the area or real estate market but they all seemed to be pretty happy with their choices.

If I moved to a new area I would probably want to rent for a while to get the lay of the land.

Mike

13 Brip Blap

My hot tip? Buy low, sell high. Seriously, alternative energy – if not now, 20 years from now. The oil’s not lasting forever.

I dunno about the house. I don’t like the area I live in much – it’s expensive and the schools suck – but I knew that going in and the house itself is wonderful and four years in still feels just about perfect. I bought it sight unseen – it was still under construction when I bought it, so it’s even more impressive (I guess) that it has been such a nice place, since the first time we saw it was the day we closed…

14 Four Pillars

BB – I’ll keep the alternative energy in mind.

That’s great that you enjoy your house so much.

Mike

15 telly

Mike & Guinness, you’re not the only ones. Our house is nowhere near perfect but we’ve grown to really like it (and the low mortgage payments that come with it). Some of the things we’d change now are things we hadn’t even considered previously.

Great post Mike. A lot of things really hit home for me. Like you, I dream about Assest Allocation as well (sad, I know) and find myself overthinking and tweaking too much as well.

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