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According to Malcolm Gladwell's latest book quite often we have discovered the truth of a situation long before we are aware or able to communicate it.
In Blink Gladwell uses a game to demonstrate this. In one example, his test subjects are shown four packs of cards, face down. Two are red and two are blue. Participants must choose the correct combination of cards to make money.
After an average of 50 tries, participants realize that blue cards are the means to greater wealth over time. Red cards are much riskier, and the down side is much bigger than any up.
The point of the game is not to find out how quickly participants can rationalise the game, but how quickly they subconsciously understand its dynamics.
Participants were wired up to see the effect of the game on their heart rates. After ten cards or less, red cards induced palpitations. Blue cards produced no results at all.
In other words the test subjects subconsciously understood the game very quickly, but it took their brain another thirty to forty rounds to be able to explain it - and their actions.
George Soros, the $9bn man who made a large chunk of his fortune betting the UK would crash out of the ERM used to suffer back aches - which was his body's way of telling him he need to change his market holding positions.
This is a quote from his son, Robert speaking to Soros' biographer, Michael Kaufman: "My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it's his early warning system...
"He is... living in a constant state of not exactly denial, but the rationalisation of his emotional state."
Last week I wrote a column on Dubai property prices. It sparked a lot of debate, with many of you giving infinitely superior rationalisations of why I was wrong - and in far fewer cases right - regarding Dubai's housing market. My argument was simple: a lack of decent places to live and work in a booming Middle East give Dubai scarcity value - and that means there was more room for property prices to rise.
Most of you disagreed.
What we are all doing is trying to justify a gut reaction as to where we are on the above chart of what a bubble looks like over time. Some of you may argue we are not on it at all.
I have borrowed this chart from Soros' latest book, The New Paradigm of Financial Markets.
To fully explain the curve I would need to go into Soros' philosophy regarding reflexivity - which would be worthwhile, but not within this column. Instead, I will explain what the stages look like.
The graph or market takes off at point 2. This is when a trend is recognised (house prices are rising), and is reinforced by a bias (the belief that prices are undervalued and will continue to rise). In a bubble this results in valuations considerably higher than 'equilibrium' - the normal balance of supply and demand.
Normally the checks and balances of a market will mean at some point 'testing' will occur (houses on the Palm fell briefly in 2006 as premiums sky rocketed, and the market wobbled in realisation that many units would not be completed for several years - stage 2). In most cases the set back will return a market to equilibrium. In a bubble, however, the testing is shrugged off and both the trend and the bias continue (3), normal rules of the market are jettisoned and prices take off (4). It's at this point, investors are said to be irrationally exuberant, and believe things really can be different this time.
According to Soros, there is always a moment of truth, however - stage 5 - when "reality can no longer sustain the exaggerated expectations". In period 6 people continue to play the game but no longer believe in it. Point 7 is reached when the trend turns downwards (house prices fall) and the bias inverses (property prices are over valued), leading to a "catastrophic" downward acceleration (8), also known as a crash.
According to this model the boom-bust cycle starts slowly (prices rise gently), accelerate gradually and then fall steeper than they have risen.
Given Malcolm Gladwell's argument that subconsciously we understand a situation before we can provide a full justification of what is happening, I would like to conduct a little experiment.
What I would like to do is use the Internet to draw your collective subconscious together to pinpoint where as a group ArabianBusiness.com readers think we are on this chart. I will publish the median score, and if enough of you take part, your best arguments to justify each position.
Those of you who argue that we are at stage 1 are arguing we are not in a bubble at all, but that prices are rising to a genuine equilibrium.
Those of you who argue we are in stage 2 are arguing prices have only just begun their journey, and the market will at some point test and correct itself.
Those of you who say we are on points 3-5 are arguing that we are in a bubble, but we have not reached the peak yet.
Those of you who say we are at poing 6 are arguing we no longer believe in the valuations - and that a crash is imminent.
Very few of us are blessed with a back pain that helps us predict the future. However, what we have that Soros does not is the Internet, and the ability to draw together the gut instincts of thousands. Comment on this article and we will together form an overview of how much leg room property prices have to run. Make sure you detail whether you are talking about Dubai in particular, or the region as a whole.