Mastering Decision-Making: The 37% Rule
Finding the best approach to decisions is interesting. The idea of optimal stopping comes across the realms of mathematics and computer science. Whether looking up a new apartment, selling stock, or a lifetime spouse hunting adventure, it gives one a disciplined method of making decisions, which positions one to maximize his chances of success. Optimal stopping addresses the question of the best times to take a particular action that maximizes the expected payoff or minimizes the expected cost. Perhaps one of the commonly known optimal stopping problems is what is referred to as the “Secretary Problem.” This is the empirical hiring of a secretary, where one must interview a pool of applicants and decide on the spot whether to hire each candidate. Once one, whomever is rejected cannot be revisited.
Optimal stopping problem solution
It is expected that we should spend the first 37 percent of the time on candidates without making a decision. This means deciding on the option that is better than all the previous ones. Even though this might seem very little, it gives us a 37 percent chance of selecting the best candidate when the process is compared across different combinations. This is one of the various optimal-stopping problems that may be solved.
Real-Life Applications
Optimal stopping isn't just a theoretical concept; it has practical applications in various fields:
Stock Trading
In stock trading, optimal stopping can help you decide when to sell a stock. By setting a threshold based on your target profit or acceptable loss, you can make more informed decisions about when to sell.
Apartment Hunting
If I'm looking for an apartment next month, I should spend 37% of the first 11 days searching without signing a lease. This means I should be able to find and sign for an apartment within the first 11 days.
Variations of the Optimal Stopping Problem
The basic 37% rule can be adapted to different scenarios by modifying the assumptions. Here are a few variations:
Rejection Probability: If there's a 50% chance that your chosen option (e.g., job offers) might reject you, you should start making offers after evaluating 25% of the possibilities.
Recall Allowed: If you can go back to previous options with a 50% success rate, you should extend the evaluation period to 61% of the possibilities.
Full Information: If you have complete information about the quality of each option, you can set a threshold and accept the first option that meets or exceeds this threshold.
Conclusion
Optimal stopping provides a robust framework for making decisions in various aspects of life. By understanding and applying the 37% rule and its variations, you can improve your chances of making the best choices. Whether you're apartment hunting or trading stocks, optimal stopping can help you confidently navigate the complexities of decision-making.