“Famous Odysseus, great glory of Achaea, draw near, and bring your ship to rest, and listen to our voices. No man rows past this isle in his dark ship without hearing the honeysweet sound from our lips. He delights in it and goes his way a wiser man. We know all the suffering the Argives and the Trojans endured, by the gods’ will, on the wide plains of Troy. We know everything that comes to pass on the fertile Earth.”’ -the Sirens in The Odyssey of Homer
Odysseus outsmarted the Sirens because he understood his own frailties. He fills the ears of his sailors with wax and has them tie him to the mast under instructions not to release him. Though he later and quite predictably tries to break free in an effort to steer the ship towards the Sirens’ voices (and the rocks), his sailors, as instructed, refuse to untie him. He knew that many men before him had been lured towards the rocks by the Sirens sweet songs. There they met their deaths. For all his bravado, he had the humility to accept that he might be as susceptible as all the men that came before him to their songs.
The mind has a way of compensating for its own deficiencies. Like my father, I put important documents for the next day’s business in my wallet when I get home from work so I won’t forget them. My mind is weak and prone to forget things that I don’t ALWAYS bring with me to work, but I never leave home without my wallet. I hack my own forgetfulness. I always take my wallet with me to work in the morning; therefore, I will take whatever is sandwiched into my wallet to work. Odysseus hacked his fear of temptation.
I’m shamelessly borrowing Nassim Nicholas Taleb’s Odyssean analogy from his book Fooled By Randomness on how humans can hack their own frailties in the investment domain. Taleb said it better than I ever could: “Odysseus, the Homerian hero, had the reputation of using guile to overcome stronger opponents. I find the most spectacular use of such guile was against no other opponent than himself.”
How can a homeowner, when consulting with his or her realtor, or an investor consulting his or her partners, think about pricing a home so that they are not tempted by the sort of emotional frailties that are hardwired into us? In three words: cultivate selective memory.
When my partners and I discuss pricing a home that we have built or renovated for sale, we avoid discussing our costs into a project. Like the Siren’s songs, our costs for land, for sticks and bricks, for fees for architects and change orders are a dangerous distraction. The market does not care what our costs are. All that matters when pricing a home is what the market will bare.
When pricing a home or an investment for sale, if it must be sold, one must avoid the temptation to think about if the proceeds from a sale will meet one’s lifestyle goals. For example, a seller might want to price a home at $725,000 because, after accounting for fees and paying off a mortgage, a sale at $725,000 will leave enough money to fund the purchase of an RV and a world tour, or a boat or whatever the case might be. Bottom line, if you have to sell, you cannot price things based on how much money you need to net in order to meet your lifestyle goals. The market is as harsh as the Siren’s rocky coastline. She does not care what your goals are.
Do not price a home or an investment asset based on what someone once offered you for it. Home values in southern California are volatile. Over the years we’ve met more than a few would-be sellers that had an inflated offer from a homebuilder, or better yet from a buyer backed by Lehman Brothers, for their land back in 2006. After meetings like this, I feel like these sellers are doomed to walk the earth for the rest of their lives waiting for an offer for the same amount of money. It might never happen and even if it some day happens, capital has been tied up in a house that could be deployed into a better investment or something that brings the owner pleasure (that boat or RV). Don’t forget, there’s a reason Lehman Brothers went out of business. Behavioral economists call this kind of behavior anchoring. Such a would-be seller is anchoring his mind to a value that maybe once made sense, but fundamentals and therefore asset values have long since changed.
Just because a plot of land was worth $2M in 2006 does not mean that it ever has to be worth that much again. By analogy shares of Cisco Systems, Inc. peaked in March of 2000 at ~$77 a share. Sixteen years later they are not worth half of that. I had many conversations with friends in 2003 and 2004 about their shares of Cisco Systems and asked them why they are holding onto their shares. The response was always the same: “it will get back to where it was.” In some instances, this was not just anchoring but also loss aversion. If they purchased shares for more than the current share price of ~$30 it is emotionally difficult to sell. On a deep level, it requires an acknowledgement that they previously made a mistake. My advice: do as Odysseus would and hack your own investment frailty by becoming selectively forgetful. Your wallet, whether or not it is stuffed with reminders for the next day, will thank you.
Bob Flynn December 15, 2016