Simplification Through Complexity: Managing Your Real Estate Portfolio


I did not lose my mind nor am I trying to sound like I’m talking in circles. Something called Complexity Theory is a known commodity and actually works. Hence, simplification through complexity. The below explanation of complexity theory was borrowed from an article at American Thinker.

That particular article deals with politics and our current president. After I read it, and in fact re-read it, the light bulb went off. To me, this explains our current real estate mess down to a gnat’s behind. In fact, in my opinion, it explains why we at the bottom keep getting buried when a big player at the top makes a move.

Complexity Theory

Complexity Theory deals with understanding the processes which are involved in the workings of highly complicated, interrelated systems in various areas: ecology, sociology, economics, computers and many other disciplines. To better understand the Complexity Theory, let’s examine a deceptively simple system: a pile of sand.

Imagine grains of sand, all exactly the same size and weight and all being dropped at the same rate onto a flat metal dish one grain at a time. With each new grain of sand placed on the surface of the pile the stresses on the internal grains, pushed and pressured against each other by the increasing number of new grains dropped on the surface, grows. One internal grain pushes on another nearby; that grain, under its own pressures, presses against one in close proximity to it that exerts pressure on a series of grains in some direction. This incredibly complicated and virtually unpredictable interconnecting pressure and counter-pressure ultimately releases itself someplace on the surface, causing a mass movement of grains in a “landslide”.

The location of the “landslide” on the surface of the cone can’t be predicted nor “controlled” no matter how much one tries to tinker with the weight of the grains or the location where or the rate at which they are dropped. The internal sand grain stresses are as completely invisible to those grains on the surface as subterranean fault lines are invisible to surface dwelling people that are affected by them during an earthquake.

Surface dwellers continue on as usual, ignorant of the pressures on the grains which will eventually cause their placid world to wildly shift. Some of those surface grains will be buried in the “landslide” released by energy resulting from internal pressures. Should the pressure on the internal grains be very powerful and widespread, the entire shape of the sand pile cone may drastically destabilize and appear greatly changed.

Confusion Eliminated

It is my opinion that if one can grasp this theory one can use it to structure one’s own portfolio to weather almost anything that may be dropped onto the pile. I also believe understanding this theory eliminates confusion in one’s chosen revenue generation niche. In other words, no matter which part of the real estate industry in which you chose to invest, understanding this theory will give you an advantage.

Good luck!

Photo: JacobEnos

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  1. Real estate definitely falls in this theory. Many people don’t think all the human dynamics of tenants, property managers, and crime affect them or their investments. People look specifically at the numbers only when there are many other moving parts. Real estate needs more science but is still largely an art. Knowing this prior to sinking your dollars in the real estate game will ease the burden of stress from vacancy, maintenance, evictions, and acts of God. Once you come to grips with these things, the larger benefits of owning real estate prevail.

  2. Hi Tom,

    My interpretation of this theory as it applies to real estate, is that ‘things are interconnected’.

    As Ryan touched on in his comment. There are a number of variables with real estate such as crime, property managers, tenants, etc.

    Real estate or real estate investing is affected and interconnected with many other variables.

    An interesting perspective you brought with the Complexity Theory.

    Best Regards,
    .-= Neil Uttamsingh´s last blog ..Top Blogs of the Week =-.

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