Nathanael Garrett Novosel, July 15 2020

What the 37% Rule Can Tell You About Life Decisions

If you're not familiar with the 37% Rule, it comes from optimal stopping theory in mathematics where decision makers are trying to determine the optimal point at which to stop looking at more options and select from the best they've seen so far.  In brief, it finds that if you have a large number of options to sift through one at a time and can't revisit once you've declined or see the next one until you've declined, the optimal approach is to go through about 37% of the options and pick the first one that's better than all previous ones you've seen so far.  This approach gives you the highest probability of it being the best you're going to get given the time and risk involved with having to go through them all.

The 37% Rule is just one example of people trying to optimize their decision making.  Because your life is result of a series of choices you make but you have limited time to live, you're always balancing the speed and benefit of your life decisions.  That's why you may decide on a whim how to spend a beautiful summer day, but you may mull over which career you decide to pursue—one is of little long-term consequence, while the other can change your entire life forever.

Many people prefer to focus on one approach or the other: either to make all decisions as fast and simple as possible or to agonize over every decision.  In economics, the former is generally known as a "satisficer" (i.e., someone who picks the first option that meets the criteria), while the latter is known as a "maximizer" (i.e., someone who considers every option and selects the best).  If you are happy with your life decisions and don't see any reason to change, you are welcome to continue as-is.  If you do find that you frequently face the consequences of a hasty decision or the paralyzing effects of indecision, you may wish to figure out a way to adapt your decision-making process based on the decision.

To adjust your decision-making approach accordingly, define criteria for adjusting your approach.  These are five that will cover many situations:

Why these five?  Let's start with the first three, which focus on the value of avoiding a bad decision:

Now, let's look at the cost and benefit of a good decision:

These are just examples; you may think of your own criteria to define.  For the above, if you feel like the risk, impact, cost, or value is high and speed is not a concern, you might wish to spend more time evaluating the decision and act more like a maximizer.  Alternatively, if they are low and you might not make a decision if you procrastinate, there is value in speed and being decisive like a satisficer.  Finally, there is a possibility that you’ll learn more if you choose incorrectly and can change your mind later than if you never decide at all, a satisficer approach might work (or, alternatively, a “decisive maximizer” approach where you’ve agonized over the decision and still can’t decide so you just decide to decide).

That's what the 37% Rule is all about: is there a way to balance speed, risk, cost, and value in decision making?  The insight can be applied to any decision you can make: consider these factors when determining which approach to take, and you'll be much better off in the long run with how you make life decisions.  You'll spend more time evaluating mortgage rates (i.e., decisions with lifetime financial impact) than you decide which toppings to put on a pizza (i.e., ones with minor impact on enjoyment, health, or cost), and you'll minimize the consequences of bad life decisions as a result.

Written by

Nathanael Garrett Novosel


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