Real Estate blog

The Black Swan :: The Highly Improbable and Real Estate Investors

Real estate books are a mixed batch. There are those that I recommend, such as Eldred and McLean’s excellent Investing in Real Estate, now in it’s fifth edition. On the other end of the spectrum is Robert Kiyosaki’s bestselling fable Rich Dad Poor Dad, a dangerous and misleading book if ever there was one.

In discussing books for investors I often end up recommending books that aren’t really real estate books, but which hold some insights that investors would be wise to heed. Nassim Nicholas Taleb’s recent release The Black Swan falls into this category.

The Black Swan discusses highly improbable events - like the occurrence of a black swan in nature – and how they impact our society. Taleb comments on our collective overestimation of what we know (and our underestimation of what we don’t), our reliance on phony experts and the general folly of forecasting.

The book isn’t without it’s drawbacks. First and foremost is Taleb’s unsufferable tone; one gets the distinct impression from reading Taleb’s prose that he’s one of those types that’s entirely too fond of the sound of his own voice. Much of the book is spent ridiculing famous figures whose theories he disagrees with - including Nobel prize winners Myron Scholes and Harry Markowitz. He lauds the guys who “get it” (from street-savvy traders to literary sophisticates) while heaping scorn on the squares (from tenured academics to pencil pushers in corporate America). It would appear that Mr. Taleb’s intention is to syle himself as an out-of-the-box intellectual maverick, but unfortunately he comes across as preening and petty.

And that indeed is unfortunate, because beneath these annoyances there is a lot to like about The Black Swan. Many of the book’s revelations are relevant to real estate investors. Among them:

We’re hooked on phony experts.

Taleb calls this the “empty suit” problem; he opines that there are many fields in which the “experts” are no better at predicting the future or producing effective results than a reasonably informed layman.

According to Taleb, there are experts who tend to be true experts and experts who tend to be…not experts.

In the “real experts” category fall (among others): livestock judges, astronomers, test pilots, physicists, and accountants… In the “empty suit” (faux experts) category fall (among others): stockbrokers, psychiatrists, college admissions officers, intelligence analysts, economists, and personal financial advisers…

He poses the following thought experiment: Would you rather have your upcoming brain surgery performed by a newspaper’s science reporter or by a certified brain surgeon? The answer to this question is obvious – but it can’t automatically be projected on all professions. His follow-up question is whether one would rather listen to an economic forecast from a prominent academic with a PhD from a respected institution, or from a newspaper business writer. The answer here isn’t obvious.

This example will sound familiar to most real estate investors. Chances are you’ve heard it before – from a Realtor. Your average Realtor will consider herself closer to the brain surgeon analogy.