Real estate example.

From “Smart Choices” by John Hammond

Here is a real estate example from “Smart Choices”

• “Darlene and Drew started with an overly narrow problem definition: ‘‘How do we renovate?’’ Their trigger was the need for additional space to accommodate the new baby. At the outset, they didn’t stop to think about the different ways to state the problem—they jumped to the conclusion that renovation was their best option. Luckily, John’s naive question—‘‘Why do people move?’’—got them thinking more broadly.” (p. 28)
  
  
• “Thunderstruck, Drew exclaims, ‘‘I can’t believe this! For two months now, we’ve been talking about needing space and renovating. Boy, sometimes it just takes an eight-year-old to set his parents straight! Our real problem isn’t ‘How should we remodel?’ It’s ‘How do we get enough room for our growing family?’ or ‘How do we get a better home?’ Remodeling our house is only one possibility!’’” (p. 27)
  
  
• “First, they should take more time to reflect on still other possible problem definitions. They might take into account how, for example, a move out to the suburbs would affect their quality of life. Or they might think about whether they’ll have a third child in the future or whether there might be an aging relative to house and care for.” (p. 28)
  
  
• “Second, they should identify and examine some of the assumed constraints surrounding their decision and ask themselves whether they might want to loosen, eliminate, or replace some of them. If they moved, for example, how much would it matter if they were farther away from Drew’s or Darlene’s family? Might they be able to find good jobs with different employers, widening the geographic area available to them? Expansive thinking generates better problem definitions. And better definitions open up a broader range of creative solutions.” (p. 28)

Objectives

• “Drew and Darlene Mather now have two possibilities for getting adequate space for their growing family: to renovate or move. ‘‘OK,’’ Drew says, ‘‘if we’re really serious about this, let’s draw up lists of why we should move and why we shouldn’t. What do we really want?’’ Darlene takes out a pad and pencil, and after about an hour of lively discussion, she has filled up a couple of pages with their ideas. During this conversation, their son, John, appears and, seeing what they’re doing, contributes a few ideas of his own.” (p. 43)

Their process might have been improved, however, if they had followed these guidelines in working up their list:

• “The Mathers did a lot of things right in thinking through their concerns and translating them into a list of objectives. They took the time to write them down, and they pushed themselves to define their main objectives in terms of their subobjectives. Their process might have been improved, however, if they had followed these guidelines in working up their list:” (p. 46)
  
  
• “For joint or group decisions, first have each individual draw up a list separately, then combine them.
  
  
• Phrase each concern as a true objective, using a verb and an object.
  
  
• Ask ‘‘Why?’’ for each objective. The Mathers are presumably concerned about crime and traffic because they are concerned about safety. By specifically listing ‘‘Maximize safety’’ as a fundamental objective, other safety issues—steep stairs, retaining walls, and so on—might emerge as important means objectives.
  
  
• Ask ‘‘What do we really mean by this?’’ This question will lead to a better understanding of such concerns as, in the Mathers’ case, cost and school quality. Does ‘‘Cost’’ refer to the sale price, the size of the down payment and other up-front costs, the size of the mortgage, or the monthly cost for mortgage payments, taxes, improvements, maintenance, and insurance? Similarly, ‘‘Quality of school’’ has many components, and to make meaningful assessments and comparisons, the Mathers will need to define exactly what school quality means to them.
  
  
• Once the Mathers have more clearly defined their objectives, the following suggestions would help them further refine their list:
  
  
• Visit and evaluate some homes currently on the market before finalizing the objectives. This step would help the Mathers verify and extend their understanding of their initial objectives.
  
  
• Imagine the purchase or rejection of a few different houses and consider how well or easily these choices could be explained to others using the stated objectives.
  
  
• Be alert to the possible emergence of an important unrecognized objective, such as a house’s potential to appreciate in value.

Alternatives

• “Over the next few weeks, the Mathers pore over listings and visit many houses. Several meet a lot of their objectives, but Drew and Darlene don’t put in any bids. The family is in a search phase, trying to get a feel for the possible.” (p. 62)
  
  
• “So Darlene pulls out her list of viable alternatives. The house on Eaton Street has a yard big enough for a dog. The Wade Street house has the best school district of the lot. The West Boulevard house is sort of crummy, but a terrific buy. The house on Amherst is a bit distant, but the neighborhood is stable, with great amenities. Finally, their own house at 281 School Street needs some renovations but is a decent default option.” (p. 63)
  
  
• “By evaluating neighborhoods first, for example, the Mathers could have narrowed their search, ruling out locations that did not meet key objectives such as school quality and commuting time. They might have saved a lot of time by only visiting homes on the most fertile ground.” (p. 63)
  
  
• “Be proactive in creating alternatives. The Mathers could have asked friends or friends of friends in attractive neighborhoods to alert them if a house was about to come on the market. They might also have placed a newspaper ad themselves, specifying what they were looking for in a house, rather than merely responding to others’ ads. This would accomplish what John had wanted to do by making an announcement to his classmates, but in a broader sphere and in a more discreet way.” (p. 63)
  
  
• “Think carefully about the right time to stop looking for new alternatives and make a decision. This is often a challenge. The Mathers were pushed by their realtor, who took the initiative to say, ‘‘It’s time to decide.’’ By quickly agreeing, they avoided further searching, but it may have been wiser to think twice. Only the actual decision makers can truly say when and if they are ready to make a choice.” (p. 63)
  
  “One more thing to keep in mind as we move on: never irrevocably commit yourself to considering only existing alternatives. The Mathers have five houses on the table. But they should continue looking while they evaluate these. They may reject all five after further analysis or unsuccessful offers, and they’ll want to have more options available.” (p. 64)

Consequences:

“Darlene agrees that they need a more accessible format. Using her original list of ‘‘What We Want in a House’’ (Chapter 3) and her notes, Darlene clarifies their objectives by going into more detail on some subobjectives. As a result, she puts together a new table, which compares the consequences for each house in terms of each of their six objectives.” (p. 79)

“At this stage, the Mathers might benefit from the following suggestions: •Identify or construct scales for some objectives. Scales would both clarify the meaning of some objectives and facilitate comparisons among the remaining alternatives. Take ‘‘Crime,’’ for example. Are the Mathers concerned with violent crime against people, with property crime, with vandalism, or with all of the above? Are data available on the annual incidents of each type of crime for each neighborhood?” (p. 80)

“Check all consequences for accuracy and stability. John, a third grader, may now have a 5-minute walk to his primary school, but if the walk to the local middle school, which John will attend in three years, is 20 minutes, using 5 minutes as a consequence description would be inaccurate. The Mathers may need to think a little bit further into the future.” (p. 80)

Tradeoffs

‘‘Well, the scores on your table add up to 12 points for Wade and 15 for Amherst, and the fewer the points the better.’’ Drew and Darlene mull this over. Is it right to just add the ranking scores? No, they finally decide; both Wade and Amherst are better on three objectives. The rankings capture neither the degree of superiority of one over the other nor the nature of the differences, and both are important for their decision. To better compare the pros and cons of Wade and Amherst, the Mathers return to the consequences table (page 78). After a while, Drew says, ‘‘I’ve been agonizing over this table, and it’s hard to see which is better. One thing I realize now is that I don’t really understand the cost implications of either alternative very well. Let me work on that for an hour or so.’’ (p. 105)

“Drew goes to work on the monthly costs of ownership. In other words, he digs deeper into the cost portion of the consequences table. He considers mortgage, upkeep, insurance, and real estate taxes. He reduces the mortgage interest and real estate taxes figures by the amount the Mathers would save in deductions on their income tax. He also estimates the equity buildup after 10 years resulting from the appreciation of each house and the paying down of the mortgages. After completing his financial analysis, he summarizes his conclusions to Darlene. ‘‘It all boils down to Amherst’s being about $150 per month more expensive than Wade. However, that added expense per month buys us something financially. We’d have more equity building up at Amherst than at Wade—about $24,000 more in 10 years, I estimate. That has to be taken into account. These numbers surprise me. I thought that Amherst would be much more expensive than Wade, but it really isn’t. With Amherst, we’d have a sort of forced savings plan.’’ (p. 105)

‘‘When I considered the longer commuting time for Amherst, I had in mind your frustration and the time you’d waste stuck in traffic. But John had a different twist. He said, ‘If Daddy has to travel more, he won’t have time to play with me before dinner.’ And this got me thinking about the real downside of a longer commute. As it is, you only have about two hours between the time you get home and the time John goes to bed. A longer commute will just cut into the time you have to spend with John and the baby. That’s serious! So . . . I think the advantages in location for Wade outweigh its other slight deficiencies.’’ (p. 106)

“In specifying their original objectives and subobjectives, the Mathers did not ask ‘‘Why?’’ often enough. Why, for example, did they want to reduce commute time? If they had, perhaps they would have identified earlier the objectives of increasing Drew’s play time with John and reducing his grumpiness. •The Mathers could have used the even swap method to compare the relative pros and cons of the final two contending houses. This would help identify the Wade house as the smart choice and clarify the basis for this choice. •When only Amherst and Wade remained as contenders, the Mathers could have listed the pros and cons of one house versus the other and applied Benjamin Franklin’s method for balancing the pros and cons to help make a choice.” (p. 107)

Uncertainty