This course is designed for students of all backgrounds who have an interest in how firms are governed, the forces that have helped define modern management practice, and the outcomes of that practice not only for the firm itself, but also for the societies in which they operate. For students who are thinking of a career in management, it may also prove useful as a basic introduction to some of the conceptual vocabulary and ideas behind modern theories of management. Using a wide disciplinary approach - from economics and history to social theory and even a smattering of biblical criticism - the course will invite students to consider several core management strategies and priorities from often unexpected perspectives in order to judge their success or failure. The key objective of the course is to bring into critical focus how we think about the function and culture of management, how managers understand their role within a firm, how they take decisions, set priorities and benchmark success and failure. Topics include: the function of the firm; the role of incentive; the ways in which narrative forces shape decision making, and how market relationships define the managerial culture in ways that can lead to sub-optimal outcomes.
Home-Buying as An Investment
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En provenance du cours de IE Business School
Critical Perspectives on Management
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À partir de la leçon
The Power of Narrative
What do Hollywood movies, the Synoptic gospels, housing bubbles, Alan Greenspan's monetary policy, and the world's worst merger have in common? This week's lecture will develop a reading of narrative in order to explore a common pitfall that affects many managerial decisions.
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Rolf Strom-OlsenProfessor
Humanities
[BLANK_AUDIO]
We have this discussion of the housing market, so I'd like to I'd like to
review the the article by Case and Shiller
we're going to do two things with this case.
First, we're going to examine the nature
of market participation in straightforward terms.
So, we're going to let the participant speak for themselves and find out what
they were saying about this market into which they, into which they were buying.
And after we've done that, what we'll
do is we'll investigate why market participants saw themselves in this way.
So, but first we're going to establish the
groundwork for what they, how they actually participated.
Once you've done that, we'll come back and ask the critical question, why.
And then finally, we will try and take
away some elements from this in order to see
how this concept of narrative might be helpful
to us in terms of illuminating issues of management.
Okay, so Case and
Shiller, is there a housing bubble?
Or is there a bubble in the housing market?
Published in 2003, data collected in 2002. A very interesting and important article.
I'm going to make the case for you at the end why in fact
this is such an interesting and important article for us to have read.
But for the moment you'll just have to take my word for it.
Let's note a couple of things about
this market that Case and Shiller are interrogating.
First, it should be of some distress, perhaps, to us that they were able to send
out the exact same questionnaire in 2002, that they sent out in 1988.
To participants in the last bubble.
So a mere 14 years between bubbles.
And they didn't have to change a single word in their questionnaire,
they could send exactly the same thing out, interrogate the same conditions.
Second thing we might note about this,
2002, it's important, the timing matters for us here in terms of
looking at this case because 2002, is a traditional mortgage origination market.
The market that collapsed in 2007, as we all
know was contaminated with all of this sub-prime lending.
That had gone on.
That's not the market we're looking at in 2002.
The market in 2002, is overwhelmingly
still a traditional mortgage origination market.
Which means, you as a home-owner
had to put up lots of your own cash to move into a house.
You had to put up 15, 20, 25% of the
equity in order to secure the rest through a mortgage.
So, we're not looking at the kind of perversions that
take place later in this market through sub-prime lending and so on.
We're looking still at traditional patterns of mortgage origination.
With that in mind, let's start with this initial premise.
According to the article, according to the data that our authors collected.
The overwhelming majority of respondents indicated that
they saw their house purchase as an investment.
Did they not.
Something like 85 or 90% of respondents saw
their purchase of a house 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.
Only about 10%, less I think in some cases. But, in terms of how they saw it.
In other words, how they saw this use of their money?
Meant most of, almost all people saw it as an investment.
Well, if they saw
it as an investment.
I think it makes sense for us to consider it then as an investment.
So, let's start by asking, in investment terms, considered, since the
respondents themselves tell us, we see, I see this as an investment.
Let's ask how they saw it as an investment.
So, what are the facts that we want to pull out from this,
that corresponds to how our market
participants evaluated their purchase in investment terms?
Once we've done that, we'll then turn to
this sort of other factors about where they
got this information from and how they came to these points of view, and so on.
But let's limit our discussion for the moment simply
to this question of evaluating their purchase as an investment.
So, what would we like to say?
What's, what are some of the characteristics that our participants?
Told us about their purchase in that regard.
Yes.
>> Low risk. >> Low risk.
[SOUND]. >> How to make
cash in the future investment [INAUDIBLE]. >> Oh.
[SOUND]. >> And also.
>> Appreciation. Appreciation of the asset, yep.
Wait a minute, hang on.
It's not just appreciation, they actually, we actually have
a number. How much did they expect it to appreciate?
[CROSSTALK].
>> Ten >> 12
>> 13 >> 14
>> 13
>> About 13.5% per annum, right?
So, so it's not only that they expect that house price to go up, they expect it to
go up roughly 13.5% per annum, which means, in
other words, over a decade, the asset will triple
in value.
Okay, so yes, so they're expecting low risk, expect an appreciation.
Yes?
>> Lower interest rates? [SOUND].
Our respondents are full of opportunity cost, issues.
One of which is lock in low interest rates, right?
Interest rates are low, the cost of borrowing is low.
It's a good time to move into this market,
because I can lock that low cost of borrowing into, into my purchase.
>> Disappointment in the stock market. >> Yes.
So, what we see is a lot of our respondents are
making comparisons between housing as an asset and equities as an asset.
[SOUND].
And they're evaluating housing as a better place for them to park their money.
>> Tangible investment. >> Tangibility, that's right.
[SOUND].
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.
So, that idea of tangibility, you can actually go and inspect the asset.
>> They used the past to predict the future.
>> Okay, so we have.
[SOUND].
Experience, definitely good information they
feel that, that's certainly true.
It's a market that I know about, I'm informed
about, I actually can bring my own knowledge to
bear, so it's not a sense of a market
which is characterized by lack of, lack of information.
Whereas, what is the market that's characterized
by that sense of, I just don't know?
>> [CROSSTALK].
>> Stock markets, right?
One of the things that we find [with] our respondents.
What's the problem with equities? I don't know anything
about it. All I know is, I send off a cheque.
To whatever mutual fund it is.
So that some well trained, well educated money
managing professional can maximize my return potential with it.
I don't know anything about it.
Right? Why should I trust that guy?
With his edumecation and his 15 years
industry experience and knowledge about the markets.
I mean, that's, that, compared to my ability to
go and inspect the house on this street and evaluate
how far it is from schools and bus stops, how is that better knowledge.
So...
[SOUND].
Lack of knowledge over on the side of equities.
And we should think about that, because for many of
these respondents right, since this is a traditional mortgage origination market
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.
Or even a car. Right?
This is by far the most important purchase
of their life.
So we assume that when our respondents are
committing themselves to the most important purchase of
their life, that they are thinking through very
carefully all of the permutations of that decision makingâ¦
or that decision.
And one of the things we see is, yes, compared to equities,
which is presumably where a lot of them have their money parked.
And now to get $100,000, you have to pull it out
of your mutual fund or your 401k or whatever it is.
So they're looking at these different asset classes.
And then and
so they're, and when they're making that comparison, they're identifying this
lack of knowledge that they have about equities, which helps them to.
Explain why housing is a better investment.
Yes sir?
>> Also there was I believe there was a lack
of trust in equities because of the dot com bubble.
>> Yes, well it's not just, it's lack of trust,
but what is it that, that, that respondents think about equities?
>> [CROSSTALK].
>> They identify the volatility.
[SOUND].
They didn't really mean volatility though, did they?
[CROSSTALK]
>> They meant losses, right?
Like by, by volatility is meant downward trend.
It's actually pretty stable.
That's how they're looking at it, which is, yeah.
Losses.
What did they think of the
appreciation potential in equities, compared to housing?
[SOUND].
Lower appreciation, right? And how about the risk factor in equities?
>> [CROSSTALK]. [SOUND].
>> High risk.
Sounds like a pretty brutal place, pretty brutal market to be involved in.
High risk, you don't know anything. Lower appreciation
potential, significant chance for losses.
Why would anyone want, anyone want to keep their mo-, their money in that
market when you could move it into
a house, which has, let's review the advantages.
Low risk, good.
Strong appreciation potential, it will triple in ten years.
Capital protection, you won't lose your money.
Only an idiot would not take
this investment opportunity, would they not?
[BLANK_AUDIO]
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