Primary Sources and Black Swans

This is the excerpt for your second post.

cropped-ct-river.jpg   After working almost five years in real estate at Four Seasons Sotheby’s International Realty, IAI can attest that this is NOT representative of the housing stock in the Upper Valley. In fact, high net worth clients were looking for family compounds typically outside of the beautiful town of Hanover (home of Dartmouth College) or simply the nicest house on offer (or not) in town. My partner and I explored starting a venture called “Buyer’s Agent” in 2007 when we first moved to Vermont as we realized that any property is for sale at a negotiated price. However, this was not a good test market as the real estate market here is one requiring first hand knowledge of actual transactions – aka primary source information. Frankly, real estate appraisers go crazy trying to find comparables when the housing stock is so disparate and there is such as price differential between tax-free New Hampshire and verdant Vermont. So, a good entrepreneur must assess and characterize the environment in which he or she needs to make decisions with imperfect information.

One great tradition of Dartmouth is the madcap Winter Carnival which offer another good excuse to enjoy the winter season and skate on Occom Pond with your neighbors. Of course, in last year’s fall selling season, the supply swamped the number of buyers in the Hanover and Lyme markets (source Trendgraphix).

tgchartimage-hanover-and-lyme-high-end
Sometimes, a little chaos creates opportunity – if you know what you are looking for and have a plan in place that addresses different scenarios. Now, your time frame selection is important, to be sure, not the six year frame that Royal Dutch Shell selected in the 1960s for their “Unified Planning Machinery” which failed and was shut down in the early ’70s.
The origins of scenario planning in Shell can be traced back to 1966, and curiously enough in the organisation’s Exploration & Production (E&P) function, where some considered that it was desirable to try and assess the political risk of upstream investments by seeking to understand the forces at work. Jimmy Davidson, who had been Head of Economics & Planning in E&P, moved to head Shell’s Group Planning in 1967 and later became Group Planning Co-ordinator. At that time a formalised, single-line business forecast five years ahead–the Unified Planning Machinery (UPM) system– had been in place for two years and was already raising concerns about its flexibility in a fast changing world–a world of morphogenesis. In January, 1971, the first formal document heralding the introduction of scenarios appeared, to be followed by more developed ones.In January, 1973, “Scenarios for 1973 Planning Cycle” appeared, with three of the six scenarios outlined based upon the “impending energy gap” and possible ensuing “crisis”.In May, 1973, the perspective was narrowed to emphasis upon a scenario which “involves a threat to the economic well-being and progress of the industrialised world. (Source: “An Evolution of Scenario Planning for Supply Chain design”, by Yishai Boasson, Hebrew University and MIT, June 2004.)
Morphogenesis is one of three fundamental aspects of developmental biology along with the control of cell growth and cellular differentiation, according to Science Daily. Morphogenesis is concerned with the shapes of tissues, organs and entire organisms and the positions of the various specialized cell types. These three factors (development path, growth and differentiation) are critical factors to consider in achieving successful corporate development.
black-swans
Picture credit: Birdlife Australia – birdlife.org.au
These five year UPM plans suffered from “normalcy bias” (‘a tendency or prevailing attitude or trend toward a complacent world view’) which could not operate in the Black Swan world of Nassim Nicholas Taleb – Black Swan (Amazon, 2010)
A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb, black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives. Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

 

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