Wisest of the crowds

Trulia took a big step into socializing camp by creating a Q&A platform with the help of Pat Kitano. Very sharp looking implementation that now solidly takes Trulia from exclusively broker centric to also being agent centric. The list of reviews worth reading follows: Pat Kitano, StartupSquad, TechCrunch, Joel Burslem, Greg Swann.

Trulia’s implementation is clean and certainly ups the feature ante but is basically catch-up with others including Zillow and My-Currency. User generated content is interesting and valuable but is this going to turn into some sort of vertical social networking war where winner takes all? The audience of home shoppers currently is much older and much more tech phobic than what you might see at typical social networks so what the hell are we all doing? Is this web2.0 hipsters flexing, an investment in future behavior by home buyers & sellers, or part of some master plan to disintermediate the existing ecosystems? All three isnt a bad guess.

For a while I have been wondering which direction Trulia would point their ship - towards the incumbents or away?. It feels to me like listings are a commodity waiting to happen and so the question for listings aggregators, like Trulia, is what next? Going social gets them on plan to taking Zillow head-on without alienating their existing constituents. Zillow has ignored the brokers while Trulia has made them their buddies. Each has their natural advantages and disadvantages but Trulia’s is a safer and more optionable route. Only if you raise a bunch of money can you take the path Zillow is taking. The payoff for Zillow, however, is much bigger with the risk because the consumers are the customers and Zillow does this very well. The real estate industry will never go back and the question I have as an entrepreneur is which strategy will win? One that eats its way through the ecosystem (Trulia) or one that completely goes around it (Zillow)?View blog reactions

One of the nice things about creating something that forces people out of the intellectual cave is listening to massive justifications for crap.

For example, one thing that a few people in real estate industry are in love with is this idea that the value of a home is solely determined by the buyer and seller at a negotiation. Further, some are crass enough to suggest, essentially, that value is a nice concept - but that transaction prices are king. Okay, that is true in a vacuum. It is the equivalent of saying the cake is chocolate because the frosting is brown.  The cake can be anything and certainly no one would suggest that the frosting is the cake (except my three year old daughter).
Why do I say a vacuum? Because people enter a negotiation with information that they receive from all around - from every conceivable person they know. That information comes explicitly and implicitly. In economics its called “signalling“. The idea is that we receive information signaled from others during a transaction. I think you are not paying enough for my car, I shrug my shoulders and tell you as much. Do I really think your offer is low? If there were several people between you and me in the negotiation could the signal lose its strength or have its meaning altered?

So our actions are a function of this signaling effect. When you rely on signaling from someone, there are many problems, the largest being:

- How can you, the receiver (the principal, who is usually the buyer in the transaction), trust the signal to be an honest declaration of information?

The problem My-Currency’s CrowdValue technology solves is that we bring to the surface this information signaling that is happening underground. That is, we are putting you into the information loop so that you get all the information signals in an unbiased manner. We know there are people who have incentives to send you the wrong information signal. That is, people who use signaling to manipulate you. Markets (e.g., CrowdValue) come closest to solving this signalling problem because it is an open mechanism that serves as a battleground for opinions where information collides until we have reached a neutral and aggregated signal - the price. Furthermore, markets constantly adjust to new information - new signalling.
Bottom line is that markets enable transparency - transparency for all the information that is circulating and perhaps being manipulated before it gets to you.

Is this good for housing pro’s? Yes because people will have more faith in the system and hence transact more frequently. It also gives pro’s an opportunity to show the world that have information and know how to interpret it - by taking actions that are measureable against real outcomes.

So who determines housing prices? Everyone. Everyone connected to the buyer and seller and everyone connected to those connections. Negotiated transactions are final manifetations of the whole network - the whole process.  Are consumers getting all the information signals? Mostly no (hence the popularity of AVM’s). Is information passing through the hands of people who have opposite incentives and hence opening the question of whether it is an honest declaration of information? Come on, do I need to spell it out?

Background on Markets
Let me just start by saying that markets work. They coordinate people efficiently while communicating prices in a transparent manner. That’s why we have financial markets. Imagine a world where you get prices from a single person or a small group of people (sound like housing at all?). Any chance those prices would be incorrect or have artificially large profit margins built in?

Markets are probably among the first creations of man. I can imagine that X thousands of years ago, some guy living in a cave went out and decided to trade his five roots for a leg of antelope and, magically, a market price was established. So 5 roots = 1 antelope leg until demand or supply of one or both sides changes.

So we know markets work and that they have been around forever. They work because they are open, transparent, and continuous! They are living, breathing entities that are constantly communicating the net outcome of all participants opinions and motivations.

What we are doing
My-Currency is leveraging this fact that people can process information better than machines to arrive at value. The premise is that you need FULL information to arrive at value and the only way to get full information is to use a mechanism that is open, transparent, and continuous. Something that ‘sponges’ information and opinion from every conceivable corner and do battle with others.

We go further and we give you a peak into future expectations of housing at very granular levels. You are buyer or seller and trying to decide on timing? Look at our futures markets on zip code value per square foot and see what the community thinks the value WILL be.

Do models work?
Much of the way valuation analysis and modeling is done depends upon backward looking or incorrect data (e.g., XYZ house was expanded in 1995 but the tax records don’t reflect this) as well as general human biases.

Furthermore, the problem with mathematical models, called AVM’s, is that they are limited to sales information, tax records, and economic information. What about less tangible items like the fact that the house next door is falling apart and full of college students having parties? Or that the beautiful building across the street is going to be torn down and replaced with a garage NEXT year? Or just that there is more buyers than sellers at this point in time?

What we solve
The problem we are solving is that people want valuation information as well as contextual information (What is the neighborhood like? What is the community like? What do people think of the schools?). Additionally, consumers who need help have problems differentiating between various professionals – the question is who is smart? Who understands value so that I can get the best deal? Who is clearly connected to the community that I am buying or selling in to give me depth of knowledge to maximize my transaction?

If you are a professional, we provide you with the opportunity to show the world you are smart. We are only interested in revealing expertise, NOT revealing the lack of expertise. So if your predictions or contributions earn you status above median, we will reveal it giving you the opportunity to be discovered by current and future clients.

Gaming & Incentives
There seems to be concern that we haven’t thought through the gaming aspect of using markets. Let me just say, I have been a derivatives trader for 15 years and Vice Chairman of the Pacific Exchange (now part of the NYSE) and so gaming is front and center for anyone in the financial markets – its called, among other things, ‘painting the tape’, ‘cornering the market’ and ‘insider trading’. History is filled with these stories so this is nothing new and I have experienced all of these first hand. This is largely why there are regulations if the financial markets. Have you ever heard of the SEC or CFTC?

My-Currency does have anti-gaming algorithms in place but they are turned OFF because we want to observe behavior during our Alpha period. Long-term, we believe that if My-Currency can grow a large and diverse enough community, we won’t need anti-gaming algorithms because price inefficiencies (prices manipulated to achieve some real world outcome) will be exploited by people who have opposing incentives or those who are motivated by or aspire to achieve reputation. The best thing that can happen, if you are trying to make your mark with community, is to hunt down prices that are misaligned with reality and bring them back into line – and therefore earn community status (reputation currency).

Bottom line: Will there be gaming? Yes - even the financial markets observe this. Can gaming be managed? Yes – explicitly through our algorithms and organically through community.

Aggregation of users
Markets need people. If we don’t get people to come then we wont have markets. The number of people for a market to succeed is not that large – probably as few as ten. The markets for a single house have an excellent opportunity to exceed this number. A typical open house in San Francisco will get 50 – 100 agents plus their clients, neighbors and voyeurs. So the total potential audience is in the hundreds for a house. For our indexes, clearly it is even larger and has more relevancies for a broader base of users.

Also, please consider how things occur now. As a buyer or seller, you will get your valuation information from a computer model and your agent. I suppose the question is, would you rather have a small group of people who are motivated by building and maintaining a public reputation give you their collective wisdom or depend on a black box sitting in a basement in someone’ office? Perhaps the word of an agent whose skill set isn’t transparent is better?

My-Currency gives you the opportunity to both get that wisdom of crowd values as well as the wisest of the crowds vetting – that is, it gives you who makes the best predictions and who therefore who are the experts.