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.
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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