Sunday, March 09, 2008

This sounds uncomfortably familiar...

IF we are in a farmland "bubble" (and I remain skeptical), this is one way it comes to be:
Suppose houses are really of low investment value, but the first person to make a decision reaches the wrong conclusion (which happens, as we have assumed, 40 percent of the time). The first person, A, pays a high price for a home, thus signaling to others that houses are a good investment.

The second person, B, has no problem if his own data seem to confirm the information provided by A’s willingness to pay a high price. But B faces a quandary if his own information seems to contradict A’s judgment. In that case, B would conclude that he has no worthwhile information, and so he must make an arbitrary decision — say, by flipping a coin to decide whether to buy a house.

The result is that even if houses are of low investment value, we may now have two people who make purchasing decisions that reveal their conclusion that houses are a good investment.

As others make purchases at rising prices, more and more people will conclude that these buyers’ information about the market outweighs their own.

Mr. Bikhchandani and his co-authors worked out this rational herding story carefully, and their results show that the probability of the cascade leading to an incorrect assumption is 37 percent. In other words, more than one-third of the time, rational individuals, each given information that is 60 percent accurate, will reach the wrong collective conclusion.

Thus, we should expect to see cascades driving our thinking from time to time, even when everyone is absolutely rational and calculating. [More]
This is a persuasive argument, and would seem to work in our relatively tiny corner of the wealth marketplace, but our much smaller size and peculiarities like massive government intervention in our industry would give pause for thought at least.

I base my lack of hysteria on the realization that someone will be farming this land 10 years from now. And 20.

The key to survival is to be at least as good as the average operator. The key to success is not to worry about possible catastrophes ahead, but to be able to compete at the highest levels.

[via Mankiw]


Daniel R said...

The last two sentences are the ultimate key to farming; wise words. Perhaps if there is a bubble there will be another chance for young farmers.

Blubberball57 said...

...hmm. Well I had to read it twice and I may be going in the other direction on this, but it sounds like people are trying to keep up with the Jones's. These graduates come out of college and are looking at another American Dream of retiring by age 30-35 with investments allowing them to cruise and jet all around the world and rub elbows with the "elite".
My papaw always said".. you can tell how successful a man is by the sweat of his brow, the calluses on his hands and how happy his family is. Not to excess but by success."