Six Dominant Pathways for Personal and Real Estate Decisions

Abstract

This chapter presents a process thinking model that is an ideal adaptable structure that sheds light on critical pathways for decision-making purposes and eradicates rival alternative tentative assumptions. It integrates perception, information, judgment, and decision choice in order to reach resolution, settlement, or finding.

This book discusses a process thinking model in order to determine personal investing and real estate assessment of individuals (1) understanding the types of goals that can be reasonably accomplished in the situation, (2) increasing the salience of information that are important within the context of the situation, (3) forming expectations which can serve as a check on the accuracy of the situation assessment, and (4) identifying the typical actions to take.

We are likely to spend a great deal of time on making a decision based on how we feel or perceive a situation before we have assembled any information that will help us to make a calculated choice. Or we may base our decision choices based on what our mentors have done or what we think we are supposed to do. These are a small number of ways we make decision choices, which can prove to be costly or profitable.

The most significant point to remember is, there is no one certain technique to make a decision choice. It should all be based on your desired destination and you ought to seek out as much information as possible. The more we learn about the various segments of decision-making framework, the simpler it will be to make decision choices that will be the most beneficial.

The approaches we use to make decision choices will vary from time to time and some are least likely to get you where you want to be than others. For instance, when you use perceptual biases in making your decision choice you are diminishing your chances and choosing to let the outcome to be removed from control. It doesn’t allow you to educate yourself on the outcome and is not an appropriate manner of making a decision choice due to the lack of effort exerted.

Another way we make decision choices is through pathways. We continue to make decision choices the way we always have. The way we were taught by our parents and/or through habit. This tactic only leads us in a circle and keeps us from ever-pursuing change or advancement. Finally, there are the six dominant pathways we have available to make decision choices. This is where we weigh our options, view the pros and cons and make sure that we are going to get our preferred result. This is the way we want to train our minds to make decision choices. It is an educated approach that permits us to practically determine the outcome. Smart decision making is all about perceptual expertise and making good judgments.

If ever you are at a point of not knowing why you are about to make a decision choice be sure to take a minute to stop and evaluate it. Analyze the type of decision it is and then choose to logically make the decision by assessing the pros and cons and selecting the answer that gives you long-term success. This should open up some thought and keep you from feeling the effects that will come if you simply choose to emotionally decide.

For some of the clever decision-making processes may cause feelings of anxiety or uncertainty. Due to the old conditioning and poor decision choice biases or heuristics (i.e., rule of thumb) that we are used to taking, a step onto new territory may seem intimidating and may cause some concern.

Moreover, the more personal the decision choice, the more difficult it may become to make a wise decision over one that will bring some kind of instantaneous happiness. In these types of situations we tend to slip out of objective thinking which keeps us from thinking clearly. Therefore, let’s review the four cornerstones of decision making.

Four major concepts that affect personal and real estate financial decisions are:

• Perception (P) ~ experiences, training and education

• Information (I) ~ all available financial and non-financial information sources

• Judgment (J) ~ the analysis of both perceptual processes and information sources

• Decision choices (D) ~ involves selection of the best alternative solution or course of action

Decision making in this model is defined as a multi-stage, information-processing function in which cognitive processes are used to generate a set of outcomes. There have been differences of opinion about how many stages and subroutines within the phases exist and the order in which the stages occur. However, the three stages in the proposed model appear with some consistency in everyday life.

The model is presented in Fig. 1.1. Arrows from one concept to another indicate the assumed causal relationships that can be specified a priori using a decision-making approach. This model has been tested in various contexts including accounting, finance, auditing, military, and business ethics.

The main aspect of the process thinking modeling approach is that knowledge inputs are necessarily embedded in a context representing cognitive, behavioral, individual, and social that constrains their discovery and their usefulness in different problems. This aspect is described as “perception” in Fig. 1.1.

Fig. 1.1

Process thinking model (Rodgers 2006)

In the first stage, since individuals typically process information subjectively, it is interdependent with perception in the conceptual model. Additionally, in this first stage, perception and information directly affect judgment. Normally, before individuals can make a decision choice, they encode the information and develop a representation for the problem.

In the second stage, perception and judgment can impact on decision choice. Perception-like heuristics and more deliberate strategies (judgment) are included in most decision choices.

The four concepts of “perception,” “information,” “judgment,” and “decision choice” combine in different ways to make available for individual investors with six pathways to successful decision making. The six different pathways that investors attempt to implement in order to reach a financial decision are (Rodgers 2006) the following:

• 1. The expedient pathway

• 2. The ruling guide pathway

• 3. The analytical pathway

• 4. The revisionist pathway

• 5. The value-driven pathway

• 6. The global perspective pathway

The first pathway is P→D, the expedient pathway, which typically occurs in situations where a decision choice ought to be made rapidly. The second pathway is the P→J→D, the ruling guide pathway, whereby time pressures may be imperative but are not as immediate as the P→D pathway. For the P→J→D pathway, an investor frames the problem, analyzes it, and then makes a decision choice. The third pathway is I→J→D, designated as the analytical pathway whereby relevant and reliable information is the assurance of good decision choices. When utilizing this pathway, information will directly influence the judgment stage before a decision is made. Preferably, the information is predetermined and is weighted by other sources, without biases. The fourth pathway is I→P→D, the revisionist pathway by means of which information can influence the manner in that an individual investor perceptually frames the problem or situation before coming to a final decision. The information affects the perceptual frame greatly while one is aiming for a decision choice. In addition, information is considered an important piece of this decision-making process. The fifth pathway is P→I→J→D, or the value-driven pathway illustrates perceptual framing influence on information sources that impacts on judgment before a decision is made. The perceptual frame can change the information sources used to be analyzed in the judgment stage. Further, an individual’s education, training, economic, and social perspective has a major influence on how a situation is handled. The sixth pathway is I→P→J→D, or the global perspective pathway clarifies how information reinforces investors to adjust their perceptions before the judgment (analysis) stage begins. Furthermore, this pathway provides that an open-minded decision choice is more likely to be made due to new information that has been received by an investor (Rodgers 2006).

Task characteristics of personal investing such as investment type (bond, stock, real estate), time period, dividend or interest returns, etc., suggest seeking either patterns or functional relations in a situation. Pattern seeking is induced if the situation provides information that is highly organized (e.g., tables and charts of investment performance) and if individuals are required to produce coherent explanations of their investments. Functional relation seeking is induced if the information is not organized in a coherent manner and if the person is required to provide descriptions or predictions. Application of individuals’ perceptions to external information can create a likelihood of mistakes, resulting in heuristics and biases (discussed below) of the perceptual system and/or a mismatch to the external information. The closer the match the more relevant is the coherence between perception and information. If the coherence between the two concepts is weak, then one of the following possible scenarios may exist:

• 1. An individual investor’s framing of the problem may conflict with the external information;

• 2. The information may be providing confusing signals that cannot be properly matched with their perception;

• 3. The personal investor does not understand the external information; and

• 4. The personal investor may not trust the quality of the information.

The expertise of investors can influence how a particular problem is perceptually framed. Experts are known to strategize and encode knowledge differently from those without the same expertise level. As personal investors’ knowledge increases, their ability to gather information, to recognize a familiar pattern, and to attend to critical indicators while ignoring less important features becomes more and more enhanced over time. In an investment environment, an effective investor is distinguished by an ability to frame the problem well. Further, individuals’ behaviors can be classified as skill based, rule based, and knowledge based. Skill-based investment behavior comprises sensorimotor performance (e.g., talking, automobile driving), which functions smoothly and efficiently without conscious attention. Rule-based investment behavior is shaped by rules and know-how that can be stated plainly by the individual investors. Knowledge-based investment behavior is effective action in unique situations, which compels a profound understanding of the nature of the situation and explicit consideration of objectives and options. The misuse or lack of use of a certain investment behavior may result in bias behavior. That is, strategies employed by individual investors are fashioned by such environmental elements as task complexity and time pressures. The following are tips/advices on how to prevent irrational/biased personal investment decisions:

• a. inclination to assign undue weight to the first evidence attained,

• b. overconfidence on information that have taken on extreme values,

• c. propensity to seek evidence that confirms the current premise (i.e., confirmation bias),

• d. propensity to reason about only one or two hypotheses at a time (i.e., belief bias),

• e. propensity to be overconfident (illusory of control),

• f. aspiration to maintain consistency even if that means devaluing or ignoring important,

• g. confidence in illusory correlations,

• h. overly conservative expectations, and

• i. constructing conclusions on hindsight (i.e., “I knew it all along” or hindsight bias).

By the same token, on biases in probabilistic reasoning includes:

• a. to be unduly persuaded by the cognitive availability of information, and to misconstrue this characteristic for frequency;

• b. to anchor judgments on initial estimates;

• c. to access the likelihood of an event based on familiarity or stereotyping rather than objective frequency; and

• d. to overestimate the frequency of rare events.

In Fig. 1.1, perception and information may influence judgment. A personal investor’s framing or formulation (i.e., perception) of the problem can directly influence the structuring of the analysis (i.e., judgment) stage. Structuring can take several forms. For example, whether a decision maker chooses to use compensatory, non-compensatory or both methods rests heavily upon how the situation is designed for use.

Compensatory decision making encompasses classifying a set of elements pertinent to the decision choice, allocating a relative significance or weight to each element, calculating an overall score for each option centered on the element weight, and selecting the option with the best score. Compensatory decision making is based on utility maximization since the option(s) with the highest sum of the weighted utilities are selected. In compensatory decisions, a negative value on one element can be compensated by an equal or higher value on another element. For example, an expensive airline ticket (negative attribute) for one airline may be compensated by the better frequent flyer program (positive attribute) of that airline.

In contrast, non-compensatory decision making are those that make simpler the compensatory process by employing heuristics to promptly evaluate the alternatives with little effort. Non-compensatory decision making can provide quicker decision choices with satisfactory losses of accuracy. For example, in a non-compensatory strategy, an expensive airline ticket eliminates that option from the consideration set, with the better frequent flyer program unable to compensate for the expensive airline ticket feature.

The model presented in Fig. 1.1 allows personal investors to adaptively choose pathways in response to different task demands and that may require non-compensatory heuristics that allow for prompt decision choices. The process thinking viewpoint in Fig. 1.1 suggests that the traditional compensatory view of utility maximization and rational decision making may not be sufficient for certain tasks due to uncertainty, time pressures, ill-structured information, and changing environments.

Therefore, an individual investor ought to know an adequate set of different pathways to make selections. Difficulty will result if a needed pathway is not known or if an incorrect pathway is implemented for a problem. Investors should use selective knowledge that enables them to select pathways forming a useful solution.

This book advances that knowledge is embedded in “judgment” in our model (Fig. 1.1). Further, this knowledge represents procedural knowledge. Procedural knowledge represents knowledge about how to perform a task. Procedural knowledge can be viewed as in terms of if-then condition-action rules, which stipulate that if a particular condition occurs, therefore a particular action takes place. Finally, procedural knowledge is acquired through task experience.

The transferal of knowledge between declaration knowledge (refers to unchanging, factual information) and procedural knowledge is an interactive process, which feeds upon itself constantly. The result of this process is viewed as a skill acquisition acquired by individual investors. Further, skill acquisition or ability enables investors to refine their operational skills, which influence their decision choices. For example, investors are known to use two strategies consisting of “decomposition” and “conversion.” Decomposition permits investors to reduce a problem into subsets by drawing on their existing knowledge to make inferences, add constraints, and determine a small set of variables. This process enables the problem to be “converted” into one, which may be solved by postulating actions addressing the perceived causes. Skill acquisition can be viewed as a multifaceted process that includes knowledge and information acquisition, as well as the effects of perceptual processes.

From the information set, individual investors seek to identify important attributes or properties. Investors attempt to size down from the available information to a more manageable set. This information set is selected from the external environment, and properly coded, and becomes part of the knowledge structures. Knowledge structures comprise of declarative knowledge, which is transformed into procedural knowledge. It is the procedural knowledge that converts skill operations into the judgment (analysis) stage.

Perception can directly impact upon decision choice. Time pressures, vague goals, and high stakes may not provide an investor with the luxury of going through an exhaustive analysis. In these types of circumstances, an investor’s pattern recognition and ability to formulate a strategy may provide a more realistic response in a dynamic environment. They may rely on their abilities to recognize and aptly classify a situation. When a situation is recognized, investors implement their experience in terms of formulating expectancies, plausible goals, relevant cues, and typical actions. Implementation may follow due to time pressures and ambiguity. Likewise, familiarity with certain tasks may provide investors with the ability to use heuristics adapted to the problem at hand. Finally, investors may decompose a problem into several parts, whereby some parts of their analysis will not require a detail analysis through the judgment stage.

Summary

In conclusion, the process thinking model is an ideal adaptable structure that sheds light on critical pathways for decision-making purposes and eradicates rival alternative tentative assumptions. It integrates perception, information, judgment, and decision choice in order to reach resolution, settlement, or finding. This approach also considers external conditions such as changing environments, time pressures, incomplete information, and levels of expertise in order to make successful investment decisions.