Optimal stopping theory – how maths can help you maximise your decisions by Max Eskell

Posted by Max on April 26, 2016 in Blog, efficiency | Leave a comment

In life and business, there are many problems where the main issue is that there is a high number of available choices.  In business, these could be finding deciding on a primary contractor, choosing a joint venture partner or even recruiting key individuals.

Optimal stopping theory possibly provides help.  Briefly, optimal stopping theory suggests that you should reject the first 37% of all options, and then take the next option which was better than all previous options.

For example, if you have five weeks to choose a primary contractor.  You could expect to see possibly four a week; that is an anticipated total of 20 suppliers.  If you selected normally and selected the first ‘good enough’ option, the probability of finding the optimum supplier is just 5%.  However, if you rejected the first 37% suppliers, in this case, 18 suppliers, and then selected the next supplier that was better than all the previous suppliers, then your odds of selecting the optimum supplier would increase to 40%.

You can now use this four-step formula to make better decisions:

1. Take a realistic guess on how many options you want to consider
2. Times that by 0.37
3. Reject this number of options
4. Then, accept the next option which is better than all previous options

While I would not recommend this approach for every decision, you could use optimal stopping theory to maximise your choice when you are faced with a problem where there is a high number of potential options.