It is that time of year when professors read final exams to decide if the students learned anything during the past term. Conveniently, this time coincides with a media report on problems in the Russian real estate market and another media report on problems at a mall in Paris. So, regardless of whether you are a student or have 30 years of experience, the general lesson is that you should always be a little bit skeptical when analysing a market.
In the Russian case, the article relates several stories of how property managers are dealing with a vacancy rate of 32 percent (and predicted to rise above 50 percent) in new office buildings; and this was seen before the recent gyrations in the ruble and oil markets. This story should be considered careful as a case study in case you ever have to face this problem: when pressed, people find some interesting variations on Plan B.
In the Parisian case, the article focuses on a lack of consumer income as the source of the problem.
One of the odd things about teaching 20-year-olds is that they seriously consider the possibility of meeting a problem only rarely. They were probably attracted to the industry by stories of success. The goal of teaching is to convey a full sense of all of the dimensions of a problem.
On my tests, I ask some narrowly-focused techniques questions and some open-ended questions. I am amazed to see how many students can answer the techniques questions well but recognize only the good things in an open ended-question.
Many people suffer from Denial and it is especially hard to offer a vaccine against such thinking because people don’t recognize the attitude. One conversational tactic which I am liking more and more is the idea of a pre-mortem. It is easy to find reasons why a project will be a success and, after a failure, it is usually easy to find reasons why a project should have been criticized more harshly during the planning phases. So, in theory, it should be easy to come up with reasons for why a project will fail in advance. And that is the idea of a pre-mortem.
A second solution is to acknowledge the uncertainty. Media reports are not good at conveying that kind of insight. For example, you may have heard the news from the Bank of Canada about the housing market being 10 to 30 percent overvalued. Their Financial System Report gives more detail: it is a “95 percent confidence interval“, and that interval widened a bit before 2010. (See p. 4, and p. 15- 19 for more insights.)
Analysis is supposed to identify all of the reasons why a project could fail or not, in advance. Once those reasons have been digested by the organization, after everybody is aware of what they can know, anything which happens should be unforeseen. If true then the analyst should be blameless regardless of the outcome. Or, as Warren Buffett has said: “Risk comes from not knowing what you are doing.”