Why is such an exercise useful?

Distinguishing direct real estate investing from investing in financial assets, we need a way to think about how risk varies in the two arenas. Engineered dice illustrate this.

At the individual level, the ability to influence the outcome by adding entrepreneurial labor affects the risk involved in the investment. Astute, clever, quick or just hard working investors can increase return and reduce risk through "hands-on" management. The extra returns or reduced risk are benefits sometimes described as "sweat equity".

At the level of society as a whole, this idea supports the notion of broad ownership of land among its citizens. The maximization of the value of society's land assets may be traced to the fact that individuals hold what is known as the "residual claim". That is, the owner gets whatever is left. Thus, he has the incentive to manage the entreprise as efficiently as possible. A large nmber of owner/managers of land assets improves the fortunes of society.

The entrepreneurial real estate investor identifies markets and properties in which substantial opportunties for engineering the dice exist.

Some will complain that our engineered dice are still too simple. We have constrained the deformation process to a shape that is always four trapeziods and two squares. One might extend this idea further. For an infinite number of outcomes, imagine rolling a ball in a bowl. Each time it comes to rest at the bottom it does so on a different infinitesimally small spot on the sphere. Each point on the sphere represents a different outcome just as each side of dice have a different payoff. Yes, that would allow for more variation, but would it make the point any better?

Still others will complain that real estate is much more complex, that it is impossible to toss a building into the air to see which side lands facing up. Perhaps, but the idea of a metaphor or a theory is to model reality, not replicate it perfectly. All theories will be contradicted to some degree by actual events. The question is: Are we better off for having made decisions based on understanding of the theory?

The engineered dice story is an improvement on the simple dice roll. Once one grasps the fact that the player had to exert effort to make the dice a different shape the lesson is learned. Some players (we call them developers) will make it a more exotic shape, others a simpler one. Regardless, the mathematical probabilities are affected and the risk of the investment has been, to some degree, managed.