The Art of the Good Life #48 : The Secretary's Problem.

I've written about the Secretary's Problem before.

Suppose you are in the look-out for a piece of real estate. Different gurus have a different approach towards buying the house, but the most optimal solution is to first determine when you will need to move into your new house and then spend about 37% of that time looking at homes without committing to any purchase. The purpose of this search phase is to actually get acquainted with the range of properties that are on sale and give you a better idea of your own personal preferences. So if you have 100 days to search for a house, spend 37 days just shopping around without making a commitment.

( 37% being 100% divided by e where e is the natural number at 2.718 )

In practice, you need to be strong-willed to adopt this approach because real estate agents will try to cajole you to make a purchase. You have to hold back and resist an offer until you have a database of houses for sale.

After 37 days is reached, you should have a basic idea of the kind of house you are looking for, so when you view a house after 37 days and you find it is superior to the set of houses you have viewed during that 37 days, you should make a commitment to buy the house.

The Secretary's Problem is designed to minimise regret. It prevents you from being too hasty or overly cautious when you have a search problem.

There are problems with using this heuristic to find something :

Suppose you apply the Secretary's Problem to find a significant other and expect to have 100 dates before settling down with someone. After 37 casual dates, you finally have an idea of what kind of person you are looking for. Even after you find a person that you'd be happy to commit to, she might be also using this heuristic and still in the process of forming her own 37%.

It is also relatively hard to apply this to investing, a good equity screen can easily select the top 10 market leaders in the Singapore Stock Market.

A cursory application may make sense for a beginner. If you want to launch your own portfolio next year, maybe you should spend approximately 4 months reading up on investing and attending classes without committing to a strategy. The problem with doing that is that different trainers are not mutually exclusive to each other. You can launch multiple portfolios and have them fight each other in your arena until you find something that you like the most.