The Trade-off
Balancing Observation and Action with the Secretary Problem
Looking for an edge, traders track a host of variables. A football trader focusing on an overs strategy, for instance, might record return on investment, average odds, strike rate, goals per game, goal timings, recent team form, league tendencies, player availability, weather conditions, the referee's star sign, the alignment of Jupiter with the home team's crest, and whether the manager had shaved the morning of the game. Yet one factor is often overlooked: the timing of our decisions and how this affects overall outcomes.
Often, our choices must balance the risks of acting too quickly and waiting too long. The Secretary Problem, a concept from maths, offers a way to approach the timing of such decisions.
The Secretary Problem shows how to make the best choice in scenarios in which options appear one by one, and our decisions are final. The problem involves an interviewer meeting job candidates in random order. After each interview, the interviewer decides whether to hire the candidate or move on. Crucially, once a candidate is rejected, they cannot be reconsidered.
So, what should the interviewer do?
First, they should interview and reject the first 37% of candidates. This planned non-committal phase allows the interviewer to establish a baseline of candidate quality. After this stage, the first candidate who is better than all those seen during the observation phase should be hired without any hesitation. This approach increases the chances of selecting the best candidate to 37%. If the interviewer rejects more or fewer than 37% of candidates, the likelihood of hiring the best interviewee decreases. (It is important to remember here that we are working with probabilities, not certainties. The goal is to reduce overall error rates and accept that we will not make the perfect choice every time.)
The analogy applies directly to trading. Traders, like the interviewer, must decide how long to observe a market or event to gather enough information without waiting so long that the best opportunities pass us by. It's difficult to know the exact "37%" threshold but the principle encourages us to start with a deliberate, non-committal, observation phase to establish a baseline. Once this baseline is clear in our minds, we should act without a second thought when an opportunity exceeds our expectations.
The lesson is to avoid missing opportunities by waiting for perfection or rushing into decisions without sufficient context. Clear decision-making frameworks are needed that balance observation with action. One approach is setting specific criteria in advance, such as a minimum expected value or a target odds range, so we can act once these conditions are met. By defining these parameters, we reduce the uncertainty that leads to overthinking or delaying decisions.
