In order to prosper, we value identifying what is most relevant to measure and then precisely measuring it. As an example of the enormous potential advantage of being attentively precise over being negligently presumptive, let’s consider a brief example. The subject of the example may even be relevant to you.
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Imagine that, in a particular geographic area, there have been three straight years of increasing optimism about future prices for real estate. Researchers conducted surveys to measure what percentage of people reported an expectation that real estate prices would rise in the following year.
The average increase (in optimism, not in prices) has been 14.25% per year. We could take that information and then project that, in the next year, once again optimism will rise by that same average amount.
So, based on the information shown here, that projection seems like a reasonable speculation, right? Now, let’s get more precise and find out if that projection still seems reasonable. Of course, we would only be interested in testing this projection if we deemed to to be relevant to us personally. So, for the sake of this example, imagine that you either are considering buying a home in that geographic area or that you already own a home there.
Next, imagine that the specific data on optimism for real estate was 92.75% optimism recently, 87.5% the year before, 75% the year before, and 50% the year before that. That is four pieces of information, right? How many of them are needed to assess the credibility of the speculation that optimism in the next year will rise 14.25% from current levels?
The correct answer is that only one piece of information was relevant. If you understand that Tte percentage of people reporting optimism cannot be higher than 100%, then when you realize that current optimism is at 92.75%, you know that the absolute logical maximum increase would be another 7.25%. The percentage mathematically cannot rise by another 14.25% (because that would be 107% and 100% is the logical maximum).
If a headline reports that 107% of the people who were surveyed reported optimism about future real estate prices, that is probably not from a real study about real estate optimism, right? That is like saying “107% of voters cast ballots in the recent election.” That might be evidence of vote fraud. In some cases, it is simply impossible for a percentage to legitimately be higher than 100%.
So, there was very little information provided at first. There have been 3 straight years of increasing optimism with an average annual increase of 14.25%.
That information was accurate, but not very useful… or even misleading. It would be much more useful to report the survey results this way: “each of the last 3 years, the percentage of people reporting optimism got halfway closer to 100%.”
It started at 50%, then rose halfway toward 100% (to 75%). Then that pattern repeated, rising from 75% to 87.5%, then to 92.75%. In fractions of sixteenths, optimism was 8/16, then 12/16, then 14/16, and then 15/16.
That is a much more precise (and useful) presentation of the information (compared to only reporting the average annual increase for the last 3 years). Is it beneficial to know which information is most relevant or useful and then to obtain that information first? Could it be confusing to have a massive amount of information presented without the information being well organized?
With the example above, you might have experienced some amount of confusion at some point. For some people, the experience of confusion can be quite embarrassing or even terrifying.
We may learn the idea that it is best to avoid all confusion as well as to avoid any social recognition or social display of the experience of confusion. However, I reject that idea. Confusion is a normal part of the learning process and, if there is confusion about some information that I consider important, then I can resolve my confusion or my uncertainty by researching the subject.
So, in the example just presented, my intention was to demonstrate the importance of the issue of clarity, especially clarity about what information is the relevant priority. I did that by presenting a possible source of a small and inconsequential confusion which was easily clarified.
Since many people have a tremendous sense of urgency to avoid social criticism and to compete for social validation, they may orient themselves in a mode that I call perfectionism. That means that they may consistently attempt to avoid making any mistakes or experiencing any confusion, even compulsively or hysterically avoiding any social recognition that they may still have something to learn.
In order to avoid being recognized as being presumptive or presumptuous, some people may experience distress just about the possibility of actually testing their presumptions. They may avoid assessing their priorities and then identifying what presumptions are most relevant to them and finally testing those presumptions.
So, if it would be extremely beneficial and easy for you to do, would you be open to learning something new? Note that for something to be easy for you in the future, that does not require you to already know how to do it easily. The new things that would benefit you most could be things that do not currently seem easy to you, but that you would find to be easy if guided effectively.
Through observing your own patterns of experience and behavior, you can discover how your priorities change over time. You can also identify what presumptions about social or economic conditions would be most relevant for you to monitor or test. In the event that you test a presumption and the measurement does not match the presumption, then the test can be repeated until it is clear that the presumption was imprecise and should be updated or revised or replaced.
If you were interested in financial wealth and profitable investing, then it could be relevant for you to obtain the input of someone who understands the simplest foundations of how prices change (and who can easily and clearly communicate those issues to you). Once you are confident in the value to you of their expertise and also confident in their interest in giving you the value of their expertise, then you can do what it takes to get that value for yourself.
Now, you might not care about future real estate prices or patterns of rising and falling optimism. Maybe there are other things that you care about more. That’s fine.
However, for those of you who are interested in why some researchers measure the amount of optimism relating to any particular investment market, here is a quick hint. When we look back not just 3 years but 3 decades or even 3 centuries, we might see a pattern in regard to what consistently happens when optimism about future prices rises above 90%. Rather than continuing to increase above 100% all the way up to 107%, we see that optimism always eventually falls below 90%. We might also note that the biggest declines in price consistently happen when optimism is furthest above 90%.
Now, if you have the opportunity to borrow large amounts of money to speculate on future real estate prices, then you might be interested in current trends in relation to optimism, as well as other trends that reliably forecast future price movements in a particular market. For instance, we could look at changes in the volume of mortgage applications that have submitted (or the volume of approvals for financing). We can measure changes in demand as well as changes in supply (like the inventory of new homes that are listed for sale).