Monday, July 30, 2007


I am doing valuation work, and use NPV(Net Present Value)!! Its the superior measure, especially when considering multiple investment alternatives. IRR (Internal Rate of Return) may be easier to understand, but it is a bad way of looking at multiple investment alternatives. More to come...

Economics of Dating

This post will be filed under Monday-FunDay... though technically any day can be a FunDay, Sunday being my favorite day for FunDay. Today, being Monday will have to make up for the lack of fun yesterday. I was browsing through the Free exchange blog at the Economist website, and I came across an interesting post on how male dating prospects would be enhanced by the addition of the "Crush" application to the Facebook website. Being a single guy, anything that involves the psychology and economics of dating is fascinating to me. The behavioral basis of economic decisions is a very small subset of my professional work, but a larger subset of my personal interest. It is human behavior, and the assumption of rationality that underpins economics, and one of things that I find most fascinating. I am not going to debate rationality today, but suffice it to say, most of the attacks on rational behavior I find very unconvincing because it is often a projection of the author's rationality onto their subject, that causes them to diagnose the subject as irrational. Anyhow, back to dating...

One of the common problems associated with being a male, is that there is a cost associated with getting a date. That cost is often rejection, and opportunity cost associated with rejection, though that may be somewhat offset by the benefit gained from honing a better approach. In my observation, there are three basic choice sets for dating. One, is the sales guy approach, in which dating is a numbers game, ie. ceteris paribus, if I talk to X amount of girls, I will get Y amount of phone numbers, and Z amount of dates. The second approach is a variation of the sales guy approach, we'll call it the Ali approach in honor of my friend. This approach seeks to improve on the odds by deselecting certain girls based on observed characteristics. The trade-off is that more observation time and selecting of females will increase the lower the number of X's needed to get Y amount of numbers and enhance the chance of Z dates. The third approach is to rely on the networked approach. This in my opinion has the highest chance of Z per X but, because of the limited pool of X available, it also produces the least amount of Z dates.

The different basic approach that one uses actually is very interesting, because it implies a certain appetite for risk, and also puts an implicit value on rejection, and can reveal some other insights into how this person would react in other situations.

Implied Rejection Cost
Low Medium High
Sales Guy X
Ali X
Network X

From this we can see their implied cost of rejection.

The Facebook application, because of its networked capability increase the numbers of X far beyond the number you would meet in a typical weekend. It also reduces the psychological cost of rejection because if the girl does not have you as a crush, there isn't any public rejection. My theory is that the whether rejection is public or private it doesn't really matter, because public rejection is rejection none the less. The addition of Facebook and the internet will do little change the approaches and success rates of the three main approaches. The Network guy will continue to use his network to acquire dates, and will have the highest probability of Z from X. The Sales Guy approach will have the lowest probability, but again, no matter the approach, X is the determinant factor. Your psychological profile will determine which approach you use. If the cost of rejection to you is low, your optimum dating approach is the sales guy approach. If you place a high cost on rejection, then use your network to minimize the cost of rejection. That is your optimum approach, and it is likely you place a relatively lower value on Z. Whereas the Sales Guy puts a higher value on Z. The Sales Guy probably will do best professionally in a people-centric environment because the skills he has developed to do well in dating, (deemphasis of rejection, highly conversational) will serve him well professionally. He is most likely to be a salesperson, or a hospitality type. The Ali approach is often related to a strong analytical skill set. The skills developed here are a keen sense of place, and how one fits into it, along with an analysis of a variety of factors that will ensure the greatest likelihood of success. The Ali-type is a great analyst and adviser. The Network guy is likely to be something of an analyst but not much of one, because he lacks the good communication skills that the analyst has. He is likely to work in IT, or something similar, in which high-value social skills are not that important, whereas expertise is. His job does not require innovation in a broad sense, in other words, he is not good at thinking "outside the box" but very good at managing the space within the box.

Happy Monday!

Friday, July 27, 2007

Credit Crunch?

I'm working on a piece for work about whats going on in the credit markets. I thought I'd post a quick summary of my thoughts to date.

First, the business media is FINALLY starting to notice whats been going on for at least the last month. I noticed this a few weeks ago, and started to wonder. Well, actually in my business world this has been an issue since last year. Pricing has been elevated beyond what fundamentals would dictate, as cap rates were below lending rates on some Class A deals in the coastal markets. 2005 through mid-2006 that deal gets done. Late 2006 through 2007, we are seeing deals fall through because of the credit markets. This has filtered through into the Private Equity market as evidenced by Chrysler and a few other deals (Alliance Boots, Allison Transmission) that have been unable to be sold into the market. This was all quite predictable, as risk has been steadily been underpriced because of the absence of defaults. The subprime issue has reminded bond investors that risk is still around. Hence, investors are no longer shelling out for whatever deal comes to market, thereby reducing liquidity and increasing the risk premium. All of that is healthy. Risk matters and has in my opinion been devalued by market participants in the global chase for yield. That it is returning more to normal, means that the Bernanke Fed is finally squeezing out the excess money that the Greenspan Fed injected into the market in the aftermath of the recession and September 11th. Between October 2001 and January 2005, M1 grew an average of nearly 5.5% year-over-year. Some will dispute the use of M1, but I prefer it as a money measure, because it is the only measure most easily controlled by the Fed and gives an indication of their policy stance. Looking over the last 18 months, M1 has only grown at an average rate of .5%. A far cry from the Greenspan Fed era. The excess money is finally being squeezed out. So what does this mean? For commercial real estate, a return of risk, and a cap rate reversion, especially as it becomes laughable to underwrite continuous 6%+ rent growth in secondary markets over 10 years in light of the housing oversupply. (No kidding, I've seen some deals we've underwritten with that as an assumption). For the rest of the economy, lets hope the Fed doesn't overshoot. And we should see a fall in commodity prices. I am afraid though that a recession may be necessary to put the inflation genie back in the bottle.

Monday, July 16, 2007

Barter & Real Estate

There was an article this morning in the, the Phoenix Business Journal, (sub. required) that talked about a housing related "service." The website is called, and it claims to be re-inventing the way we buy and sell real estate. Thats the headline on the website, at least. Actually, it is not a reinvention of any sort.

Being an economist, I found the site interesting for two reasons.

1. The use of Barter
2. Another demonstrated use of the internet

The use of barter is indicative that there is insufficient capital in the system and that the money system has broken down. Similar things occurred in Russia after the ruble crisis of 1998. The currency in use no longer served as a store of value, which led to it no longer being an effective means of exchange. Barter, which is demonstrably less efficient than a monetary transaction only comes into play in modern times when the money system breaks down. My guess is that in places like Zimbabwe, where the money system is broken (because of government action), barter goes on quite frequently. In real estate, the transaction market has become decidedly less liquid, particularly here in Phoenix. In other words, at the current pricing levels, there are not enough buyers in the market. Sticky pricing prevails, and hence the supply of homes, at a given price is above the market clearing rate. The bargaining comes into play because there isn't sufficient capital for these particular buyers and sellers and the transaction market doesn't move fast enough. Its interesting, because its an inefficient way to transact. WHICH, brings me to point #2... the internet.

By now, everyone has read posts about the internet and real estate, and how it changes everything. Sure. Old story, lets move along right? The oft-overlooked thing about the internet is that its greatest power is in lowering the cost of information. The dramatic effect this has had on the consumer market is evident in shopping comparison sites. It has also had an effect on the auto industry, and now it is rolling into real estate. Greater competition, and more information at effectively zero cost has reduced the value of the services that agents provide. This is the biggest effect that this site will have. The swapping is of no consequence, it is the service based pricing, that will effectively undermine the current real estate agent pricing structure. Successful agents in both commercial and single-family will need to identify how they provide value to the seller, beyond throwing things up on the MLS, which is losing its information monopoly to sites like trulia and zillow.