California Investment Network


Recent Blog


Pitching Help Desk


Testimonials

"I have been an investor for 2 years. Through this site I have managed to finance 4 projects. I am very pleased with my membership. "
Dave M.

 BLOG >> Recent

Causal Valuation [Causal Inference
Posted on November 18, 2016 @ 05:13:00 AM by Paul Meagher

I'm doing some research on real estate valuation and came across Aswath Damodaran, professor at NYU Stern School of Business. He is a prolific author of books and youtube videos on valuation. Today I checked out his entertaining and informative "Introduction to Valuation":

He mentions that there are three, and only three, approaches to valuation: Intrinsic, Relative, and Options Pricing valuation.

The idea that I am toying with is that there might be another one called Causal Valuation.

Causal valuation is an approach that tries to take advantage of some recent mathematical and conceptual work on causal graphs by Judea Pearl. See his Engines of Evidence conversation for a taste. That research is starting to emerge into the mainstream but it is not trivial to master the tools or the ideas associated with causal graph theory.

To give you a flavor of what causal valuation might look like I'll show you what a simple causal graph looks like for a non-controversial case. Below is a causal graph depicting the relationship between smoking cigarettes, lung cancer, and yellow fingers.

We might contrast this causal graph with an associative graph between the Cigarette Smoking and Yellow Finger factors and the Lung Cancer outcome.

Note that there probably is an association between yellow fingers and lung cancer but it is not a causal one, it is an associative relationship.

Most of our statistical models are associative, not causal. They might tell you to clean your fingers more often if you want to avoid lung cancer. A causal model, on the other hand, explicitly tells you there is no causal relationship between yellow fingers and lung cancer because there is no connecting line between them. Causal models also provide more guidance on where you need to intervene in order to affect an outcome.

Real estate valuation often uses the "Relative" method of valuation, or what similar homes are selling for in the neighborhood. There may, however, be factors such as net migration, wage levels, and business growth or decline in the area that are actually driving real estate valuation levels. Instead of using associative metrics to arrive at a valuation, perhaps a causal approach would lead to better valuations. That is the big idea that I have started to explore.

If you want to play around with making causal graphs, a tool I would recommend is the free and powerful online drawing tool draw.io. I used it to make the graphs above.

Permalink 

 Archive 
 

Archive


 September 2020 [1]
 June 2020 [4]
 May 2020 [1]
 April 2020 [2]
 March 2020 [1]
 February 2020 [1]
 January 2020 [1]
 December 2019 [1]
 November 2019 [2]
 October 2019 [2]
 September 2019 [1]
 July 2019 [1]
 June 2019 [2]
 May 2019 [2]
 April 2019 [5]
 March 2019 [4]
 February 2019 [3]
 January 2019 [3]
 December 2018 [4]
 November 2018 [2]
 September 2018 [2]
 August 2018 [1]
 July 2018 [1]
 June 2018 [1]
 May 2018 [5]
 April 2018 [4]
 March 2018 [2]
 February 2018 [4]
 January 2018 [4]
 December 2017 [2]
 November 2017 [6]
 October 2017 [6]
 September 2017 [6]
 August 2017 [2]
 July 2017 [2]
 June 2017 [5]
 May 2017 [7]
 April 2017 [6]
 March 2017 [8]
 February 2017 [7]
 January 2017 [9]
 December 2016 [7]
 November 2016 [7]
 October 2016 [5]
 September 2016 [5]
 August 2016 [4]
 July 2016 [6]
 June 2016 [5]
 May 2016 [10]
 April 2016 [12]
 March 2016 [10]
 February 2016 [11]
 January 2016 [12]
 December 2015 [6]
 November 2015 [8]
 October 2015 [12]
 September 2015 [10]
 August 2015 [14]
 July 2015 [9]
 June 2015 [9]
 May 2015 [10]
 April 2015 [10]
 March 2015 [9]
 February 2015 [8]
 January 2015 [5]
 December 2014 [11]
 November 2014 [10]
 October 2014 [10]
 September 2014 [8]
 August 2014 [7]
 July 2014 [6]
 June 2014 [7]
 May 2014 [6]
 April 2014 [3]
 March 2014 [8]
 February 2014 [6]
 January 2014 [5]
 December 2013 [5]
 November 2013 [3]
 October 2013 [4]
 September 2013 [11]
 August 2013 [4]
 July 2013 [8]
 June 2013 [10]
 May 2013 [14]
 April 2013 [12]
 March 2013 [11]
 February 2013 [19]
 January 2013 [20]
 December 2012 [5]
 November 2012 [1]
 October 2012 [3]
 September 2012 [1]
 August 2012 [1]
 July 2012 [1]
 June 2012 [2]


Categories


 Agriculture [72]
 Bayesian Inference [14]
 Books [15]
 Business Models [24]
 Causal Inference [2]
 Creativity [7]
 Decision Making [15]
 Decision Trees [8]
 Design [37]
 Eco-Green [4]
 Economics [12]
 Education [10]
 Energy [0]
 Entrepreneurship [65]
 Events [2]
 Farming [20]
 Finance [25]
 Future [15]
 Growth [18]
 Investing [24]
 Lean Startup [10]
 Leisure [5]
 Lens Model [9]
 Making [1]
 Management [9]
 Motivation [3]
 Nature [22]
 Patents & Trademarks [1]
 Permaculture [36]
 Psychology [2]
 Real Estate [2]
 Robots [1]
 Selling [11]
 Site News [19]
 Startups [12]
 Statistics [3]
 Systems Thinking [3]
 Trends [7]
 Useful Links [3]
 Valuation [1]
 Venture Capital [5]
 Video [2]
 Writing [2]