Property investment with positive feedback?

By Daniek Zomer

This web-post applies the characteristics of Pierson's positive feedback processes on a small-scale-case, being property-investment i.e restoring a house. 

The real-estate market offers big profit opportunities. However, it is complicated for three reasons. First, „Unpredictability”: early events have a great impact and are random, and hence many outcomes are possible. Likewise, in the beginning of the investment, when the considerations of what you think will make the house more valuable result in the budget. For example, does the central-heating/floor need to be replaced? Should walls be removed? Moreover, there is asymmetrical information for you as an investor of why the house has been unused for such a long period. It might be the case that other investors know something about the house that discouraged them to invest in it, and that you will find out during the restoring process.

Secondly, „Inflexibility” and „Nonergodicity”, for instance, when you decided in the beginning to change the place of the stairs and later find out that it does not meet the „fire safety” standards that property valuers pursue. Hence, the further you are into the building process, the harder it becomes to shift from one path to another, as you already spent the money into new stairs. Furthermore, early decisions feedback into future choices for your budget.

Finally, „Potential path inefficiency” whereas in the long run, the outcome that becomes established may generate lower payoffs than a foregone alternative would have. If you would have kept the stairs, it would have saved costs or if you would not have spent the money on a new floor, you would have had the money to solve the water drainage issue that you found during the building process which would have resulted in a greater profit.