How Do You Make Big Decisions?

Where we live - and what real estate we own - can involve big, risky, life-changing decisions. Depending on our personality and our circumstances, different people approach these choices in different ways (perhaps not surprisingly). Two common approaches to complex, high-stakes decisions are what could be called "the regret minimizer" and "the optimizer."

The "regret minimizer" employs (knowingly or not) a strategy known as "minimax regret." Minimax regret is all about minimizing the maximum possible regret. In other words it may help in choosing the option that protects you from the worst-case scenario. If you have multiple options to choose from, you determine the "maximum regret" that could result from each option. You would then choose the decision that has the smallest of these maximum regrets. A first time buyer may use the minimax regret strategy to decide when they should buy.

Possible regret if they buy now: Prices drop, and they ended up buying a home they will grow out of faster, and they could have afforded a larger home if they had waited. Possible regret if they wait: Home prices rise faster than they can save, and they're priced out of their city. If the regret of being priced out forever feels worse than the regret of buying a smaller home now, this buyer might decide to move forward sooner rather than later. It's not about what's ideal - it's about avoiding the outcome that could potentially hurt the most.

"The Optimizer" uses probabilities and is willing to accept certain risks if they can lead to worthwhile gains. They may use an "expected utility" approach to decision making. Expected utility involves assigning a value to certain outcomes and trying to predict the probability of those outcomes.

For example, Option A (Buy Now): Market stays flat, you buy your preferred home at today's prices (Utility = 85, Probability = 60%). Market drops 5%, you "overpaid" slightly but still have a home you love (Utility = 70, Probability = 40%). Expected Utility = (85 x 0.6) + (70 x 0.4) = 79.

Option B (Wait 6 Months): Market drops 5%, you find a similar home and buy at a "discount" (Utility = 90, Probability = 40%). Market stays flat, you can't find a home as desirable (Utility = 60, Probability = 60%). Expected Utility = (90 x 0.4) + (60 x 0.6) = 72.

In this scenario, even though the best-case outcome in Option B is ideal (market drops, buy a great house at a discount), the overall expected utility is lower. So a rational optimizer would choose to buy now - not because it's perfect, but because it has the best likely expected outcome.

Neither mindset is right or wrong, and we don't believe people approach decision making exactly like the example above with assigning probabilities and values to outcomes. But we do believe people employ these strategies knowingly or unknowingly without putting a name to it. We also think it is valuable for us as real estate agents to understand that different circumstances and different people require different approaches to decision making. Either way it is a fascinating subject to us, and we welcome your questions anytime! As always we greatly appreciate all your referrals. Thanks, Joe, Doug & Randal