Herman's notes on Critical Perspectives on Management

If I go to you and I say, look, I've got this great scheme. And you're going to be able to constantly promote talent, and constantly remove slackers [...] and you're going to send great signals to the market, and it's going to lead to wonderful results, what are you going to say? Well, I'll do that! [...] And if I don't tell you it's true, you won't be taking risks anymore, and your employees won't want to collaborate and they'll all hate you, are you then likely to adopt it? And the answer is yes. Because all you'll see are the positive outcomes that occur. And I suggest the reason why so many firms do it is essentially a network effect.

So as the Roman Empire expands, what you find is their military costs also increase, and Rome was under a fixed gold standard, the only money available to the Roman economy was what they could dig out of the ground in gold and silver. So here you have a problem, on the one hand you have expanding military costs. At the same time you have essentially fixed money supply. What do you do? [...] Well the Romans couldn't print money because they didn't have printed money, they did the next best thing, which is they took a 100% gold coin, they added a little stuff in there, and they made it 90% and bang, they'd increased their money supply. [...] And so, what we find is that over the course of 50 years or so, there's a steady debasement of Roman coinage easily traced to the numismatics that we have still today.

To buy their house, they have to find 100, 200, $300,000 of their money to put into this asset. This means that for most of these people, as with ourselves, this is going to be the most important purchase of their life. It's not like buying a pair of shoes.

Nice thing about a house is, you can buy it and redo the kitchen. If you buy 1000 shares of Microsoft, you're not redoing anything, right? It's just sitting there for you.

The overwhelming majority of respondents indicated that they saw their house purchase as an investment. [...] Very few of them actually were planning to use it as an investment, meaning they were not buying a house, then to rent it out and generate returns for capital.

A rational agent would accept that if they want their capital to be protected, that it will come at the cost of lower than average returns. But no, we have people who believe that they can get higher than average returns at lower than average risk.

As the value of an asset increases, what happens to its risk? Goes up. What happens to its appreciation potential? Goes down. So our market participants, are actually reading the market in a perfectly wrong way.

Who really believes that you could lower your risk, guarantee your capital, and get 14% a year? There's a reason why Bundesbonds give you 0.5%. That's the price of capital protection. You don't get to guarantee your capital and get 14%. It's a very irrational premise indeed, upon which to make an investment.

At the same time, I think it's also worth noting that this is not a U.S. story, is it? It's not, I mean the housing bubble was not an American phenomenon. Those of us in the room who are from the UK, or from Ireland, or Dubai, or Vilnius, or Barcelona, or any of the other during this period that underwent housing bubbles. We're seeing in fact really a global story, we just happen to be accessing that story through its iteration in the US.

Literally the government is, is incentivising through tax incentives to buy the house so when [INAUDIBLE] to buy the house it looks good. >> In the U.S. yeah, in the United States it's true because a mortgage is actually deductable off of pretax income which is another it gets another factor which that put under the idea of opportunity costs. Every year that I'm paying rent is a year that I'm paying more taxes than I should Because what I really ought to be doing is sort of capturing that wealth, via sort of this tax preferred or tax advantage scheme, and, and so that's sort of, you know, why would I want to just sort of throw my money away when I could be actually accumulating in tis, this acid and watching it grow.

So you know, your sister has a friend whose doctor's sister bought a house and it doubled in value in two years. Or there's the guy down the street who just sold his house for like 40% more than he bought it only nine months ago. Or whatever right. So there's all these experiences around you, this accumulated anecdotal evidence. That is typical of a hot market in which you're hearing these success stories and one of the reasons for that is that you are in a hot market when you are in a market like this and you benefit from that, what do you want to do? Brag about it!

Fundamental macro factors, that drive housing prices in the long term. Interest rates and income, right. How much money am I making, ie to put towards the house. And how much does it cost to borrow the money that I don't have.

Get on the ladder now. If you wait it's going to be even more expensive, harder to get on the ladder and so on.

Everyone is doing it, I need to do it too. We discussed before this idea of opportunity cost, that sense of urgency. I need to act now if I wait even another year prices are going to get more expensive.