30 September 2007
Market volatility brings insight into who we are. The activity in the stock market over the last month has wiped out the positive returns we had built up through June. Yet many of the people I personally know are not jumping off the ship. Instead they are taking this in stride because I think I surround myself with a lot of satisficers.
In Barry Schwartz's book, The Paradox of Choice: Why More is Less, the author points out that our culture has created so many choices for us under the guise of those choices leading to greater satisfaction. A good example of this is the cereal isle, where you literally could choose from 100 different cereals. Schwartz cautions that the excessive amount of choices we have to make everyday can lead to decision paralysis - we are afraid to make decisions because we worry we will make the wrong decision, and then we dread the decisions we make because we worry we made the wrong decision (buyers remorse).
Schwartz introduces the maximizer and the satisficer. The maximizer of choice continually worries that there is something better just around the corner. For example, there could be an investment that is hotter than the one you are in. The satisficer on the other hand goes through life making choices based on what is good enough. This does not mean that they have low standards; in fact they may have very high standards. But once they find a choice that meets their standard, they stop looking and are content. A great example with investing is finding a mutual fund with a good track record and good management and then not second-guessing your selection every time the market gyrates.
No person is completely a mazimizer or satisficer - you could be both based on the choice that needs to be made. I know many people who aüre maximizers when it comes to buying a t-shirt but satisficer when it comes to investing their money, and vice versa. The key is to understand which role you are in while making a certain choice so that you can become an observer of your own behavior. In that state of mind, you can then become a better consumer, from cereal to investing, because you can give that specific choice the right amount of time and research, more or less, that it deserves.
We all have a choice to make about how we use our time and resources to get the best outcomes. And when the market shimmies back and forth the way it has been, my experience tells me being a satisficer tends to lead to more restful nights.