A “black swan event” is random and unexpected. Popularized by Nassim Taleb in his book “The Black Swan,” which describes an event (such as the last economic meltdown) as an unpredictable event. I ask, are the repeat real estate crises of every 10-12 years unpredictable, or a bevy of black swans migrating in wedge formation?
Taleb notes these criteria:
- The event is a surprise.
- The event has a major effect.
- It should have been expected, if only . . .
In the case of economic crises, I would add one more element: groupthink [see blog of April 25, 2018]. In the Stats, Graphs, and Data Science1 class, we describe how mistakes happen.
- Error – the difference between an estimate and the actual value; or what is unexplained.
- Mistake – giving the wrong answer to the right question.
- Error of the “third kind” – Giving the right answer to the wrong question.
- Groupthink – giving the wrong answer to the wrong question; and everyone agrees!
Flying in Formation
Everyone agrees. What could possibly go wrong? Recall that USPAP sets the acceptability of the scope of work for an appraisal. It must be what clients expect. It must be what everyone (your peers) does. Flying out of formation means you have to flap your wings harder, your fellow swans may ostracize you, and people watching the migration will point you out.
You do not want to be pointed out. And you are in violation of the rules.
You may recall, for federally-insured work, you must follow the given definition of market value. [Did you read my April 25th blog?] It is what everyone does. It is what clients expect. But jump back ten years to 2008. 1) Buyers were acting speculatively with exuberance (not prudently or knowledgeably); 2) there was universal euphoria, (affected by this undue stimulus); 3) buyers and sellers were avariciously (not typically) motivated; 4) advised by commissioned salespeople (not well informed or advised); 5) exposure time was almost non-existent (not ‘reasonable’); 6) the price was enabled by unrestricted special and creative financing (not ‘normal’).
However, we got the payment in cash part right. In fact, this exchange value is what was being provided as the appraiser’s opinion of value. And it was “credible,” supported by “relevant evidence and logic.” It had to be ok. Everyone did it. Clients expected it. We flew in formation.
We still fly in formation. We migrate every ten to twelve years. We end up in the same place where people get hurt and capitalism takes a hit. Tax revenues go down. We make new rules and regulations and institutions. All is well. We join the bevy.
We fly south again.
Dean
May 9, 2018 @ 4:32 pm
George. Well written and great insights. You put word pictures in the air that are clear to understand and to the point. Many Thanks.
Jeff Luzier
May 11, 2018 @ 10:57 am
I understand the point you are making in your article, but I am uncertain as to how to not get pulled into formation. Unless we change the definition of value, or throw out all sales that do not match the intent of the current definition. I am from a rural part of the country, where we have few sales, and even fewer comparable sales. During the crazy times, we experienced a 25% (on average) increase in sale prices over a 3-4 year period (2004-2008). But prices had been fairly flat for the five years prior, so it seemed like a normal correction here. Plus, in most market segments, we did not see any big decline in prices during and after the mortgage meltdown; instead prices remained pretty flat for about five years or so, then a modest increase of about 5-10% in the past five years. Our area does not seem to be showing any signs of “irrational exuberance”.
How exactly would your Market Based Evidence program/method help to avoid another crisis? I would like to learn more about your program, but nothing is near me.