Some decisions like buying a home or investing in a stock shouldn't be taken lightly. But how do you know when you have enough information to make a good choice? In this video from Motley Fool Live, recorded on June 30, Motley Fool contributor Jon Quast explains to fellow contributor Brian Withers a simple trick that's helped him overcome analysis paralysis.
It might not work for everybody all the time. But the 37% Rule can be a handy tool when an important decision needs to be made. And the best part is Jon learned about this trick by listening to the Motley Fool Money podcast.
Jon Quast: So I suffer from chronic analysis paralysis. I think that some people might identify with that. Basically, you're afraid to ever make a move because you're just busy overthinking it. There was a book that changed -- it really helped me out -- called Algorithms to Live By, by Brian Christian and Tom Griffiths. If you Google "Motley Fool Money the 37% Rule," it'll bring up the podcast episode where Chris Hill, I believe, interviews the author.
In this book, it goes through a mathematical algorithm problem called the secretary problem. It's also known as optimal stopping. Basically, how do you know when you have enough information to make a good decision? The answer is, take whatever amount of time that you have to gather data, and after 37% of that time is expired, the best thing that you see after that is going to be basically the best option that you can or the best choice you can make.
Applying this to homebuying. If you know that you have three months to buy a home, the first month, you just look at houses. You aren't going to buy anything. You're collecting data. Then after that month, the first home that is as good or better than anything you've seen so far, you just go for it, because statistically, it's going to be the best option.
Applying that with stocks, too, I look at stocks all-day long. When something hits me as, this is as good as anything I've seen, I don't think about it too hard, I typically go ahead and make plans to buy it.
Brian Withers: Thirty seven percent. I love it. That's great. Certainly comparing, once you've seen a good sampling, like you said, a month's worth of homes. [laughs] I don't know if my wife would agree with that though. She wants to make sure that you get the absolute best, it may not work for everybody. Awesome.
