Approaches to asset valuation: Castles in the air and firm foundations

Approaches to asset valuation: the castles in the air approach and the firm foundations approach

How do we decide what something is worth? How might a new pair of sneakers be worth $1,000 while the pair next to them, perhaps better made, longer lasting and just as comfortable, be less than $100?

With the castles in the air approach, a thing is worth what others will pay for it. If you can sell it to someone for twice the price then it’s worth that. You’ll often see this in bubbles (dot com, tulip, bitcoin…). It was described by John Maynard Keynes using the analogy of a beauty contest where you have to select the prettiest faces out of 100, and the prize goes to the selection closest to the group as a whole. Whether or not they’re actually pretty doesn’t matter if you can guess which faces others think are pretty. If you can predict what the crowd will do, then you can get there first and make a profit.

The firm foundations approach, on the other hand, is about finding solid reasons for assessing value based on analysis of the fundamentals of an asset, a firm anchor, its intrinsic value. If you can value something through this approach then a good bet is simply if the current asking price is less than the intrinsic value. The market will eventually correct for it and you’ll make money.

See A Random Walk Down Wall Street, by Burton Malkiel for more.

Also see Veblen goods

Published 23 Dec 2015

A weekly sketch by email

Learn something new in a sketch each Sunday

Get the book!
Big Ideas Little Pictures

Prefer to listen?
Try the podcast

Sketchplanations is ad-free
thanks to supporters like you.See more on Patreon

Keep exploring

What is Rubberducking? Example explanation: a developer talks through their problem with the “therapist” rubber duck on their desk, only to discover the insight they need. Often useful for debugging.

What is Rubberducking? An Explanation of the Rubber Duck Debugging Technique

The Diderot Effect

Moore’s Law

Autonomy Mastery Purpose summary of Dan Pink's book Drive

What drives us: autonomy, mastery, purpose

Extrinsic motivation

5 Ways to Wellbeing

Rubberducking is a problem-solving technique where you explain your code or task to a rubber duck—or any inanimate object—and discover the solution yourself through the act of explaining. It's brilliant because it works and is effectively free. Rubberducking, or rubber ducking, is most commonly associated with debugging in software development but can be applied to any problem-solving process. The name comes from the book The Pragmatic Programmer by Andrew Hunt and David Thomas. In it, the authors suggest using a rubber duck as a conversation partner to clarify one’s thoughts. This is an accessible and effective way to troubleshoot problems without requiring someone else’s time. How Rubberducking Works Have you ever been called over to someone’s desk to help them solve a problem, and as they explain the problem to you or demonstrate it, they figure out the answer themselves? It happens all the time to me, particularly when someone's showing me how something doesn't work, and it magically works just by having me watch over their shoulder. The rubber duck technique is as simple as that, except that instead of calling someone over, you can simply replace the person with a rubber duck, teddy bear or heck, even your stapler. The psychology behind rubberducking relies on how explaining a problem forces you to process your thoughts more clearly, often revealing gaps or errors in your understanding. Here’s how you can try it yourself: 1. Set up your “duck”: Place a rubber duck, teddy bear, or any object on your desk. 2. Explain your problem: Describe your code, logic, or issue to the duck, step by step, as if you’re teaching it. 3. Watch for insights: In explaining it aloud, you’ll often uncover what’s wrong or identify a new approach to solving it. For example, a developer struggling with a bug might explain every line of code to the duck. Verbalising their logic can highlight an overlooked detail that resolves the problem. Why Rubberducking is Effective Rubberducking works because it forces you to articulate your thoughts clearly, moving them from abstract notions in your head to concrete statements. This shift can: • Help you identify assumptions you didn’t realise you were making. • Reveal errors or gaps in your logic. • Mimic the process of pair programming without needing another person. Rubberducking a problem also reduces dependency on others for problem-solving, making it a cost-effective—basically free!—and time-efficient tool for debugging. Common Scenarios for Rubberducking Here are some situations where it’s particularly useful: • Debugging code: Talk through an error or bug in your program. • Explaining logic: Test the clarity of your solution by explaining it step by step. • Learning new concepts: Summarise a concept to the duck to check your understanding (see the Feynman Learning Technique) • Decision-making: Walk through the pros and cons of a decision. Rubberducking in Software Development In software development, rubber duck debugging has become a recognised term for this process. It’s so common that some developers keep an actual rubber duck on their desks to symbolise this practice. Teams might 'joke' about needing “a duck” for the simplest bugs. Debugging is an integral part of coding, and the rubber duck technique makes it less daunting. By verbalising your thought process, you streamline problem-solving without needing external help. Frequently Asked Questions about Rubberducking Q: Does it have to be a rubber duck? Nope. While a rubber duck is the classic choice, you can use anything nearby—your coffee cup, a stapler, or even a photo on your desk. Q: What if talking out loud isn’t possible? Writing out your explanation or saying it in your head can work just as well. The key is clarifying and articulating your thought process. Q: How is this different from pair programming? Pair programming involves working alongside another person on the same task. Some people swear by pair programming, and to be honest, I've always found it effective whenever I try it. However, rubberducking is a solo activity where the act of explanation itself is the solution. Next time you're stuck on something, grab a rubber duck and give it a try. Related Ideas to Rubberducking Also see: The Feynman Learning Technique The XY Problem Bugs and releases The cost of fixing bugs Yesterday's weather Yak shaving Rubberducking is similar to the empty chair technique for psychotherapy, which involves speaking to an empty chair as if addressing a person. It's also easily confused with "rubbernecking," which is slowing down to look at an accident as you drive past—a common cause of traffic jams.…Rubberducking is a problem-solving technique where you explain your code or task to a rubber duck—or any inanimate object—and discover the solution yourself through the act of explaining. It's brilliant because it works and is effectively free. Rubberducking, or rubber ducking, is most commonly associated with debugging in software development but can be applied to any problem-solving process. The name comes from the book The Pragmatic Programmer by Andrew Hunt and David Thomas. In it, the authors suggest using a rubber duck as a conversation partner to clarify one’s thoughts. This is an accessible and effective way to troubleshoot problems without requiring someone else’s time. How Rubberducking Works Have you ever been called over to someone’s desk to help them solve a problem, and as they explain the problem to you or demonstrate it, they figure out the answer themselves? It happens all the time to me, particularly when someone's showing me how something doesn't work, and it magically works just by having me watch over their shoulder. The rubber duck technique is as simple as that, except that instead of calling someone over, you can simply replace the person with a rubber duck, teddy bear or heck, even your stapler. The psychology behind rubberducking relies on how explaining a problem forces you to process your thoughts more clearly, often revealing gaps or errors in your understanding. Here’s how you can try it yourself: 1. Set up your “duck”: Place a rubber duck, teddy bear, or any object on your desk. 2. Explain your problem: Describe your code, logic, or issue to the duck, step by step, as if you’re teaching it. 3. Watch for insights: In explaining it aloud, you’ll often uncover what’s wrong or identify a new approach to solving it. For example, a developer struggling with a bug might explain every line of code to the duck. Verbalising their logic can highlight an overlooked detail that resolves the problem. Why Rubberducking is Effective Rubberducking works because it forces you to articulate your thoughts clearly, moving them from abstract notions in your head to concrete statements. This shift can: • Help you identify assumptions you didn’t realise you were making. • Reveal errors or gaps in your logic. • Mimic the process of pair programming without needing another person. Rubberducking a problem also reduces dependency on others for problem-solving, making it a cost-effective—basically free!—and time-efficient tool for debugging. Common Scenarios for Rubberducking Here are some situations where it’s particularly useful: • Debugging code: Talk through an error or bug in your program. • Explaining logic: Test the clarity of your solution by explaining it step by step. • Learning new concepts: Summarise a concept to the duck to check your understanding (see the Feynman Learning Technique) • Decision-making: Walk through the pros and cons of a decision. Rubberducking in Software Development In software development, rubber duck debugging has become a recognised term for this process. It’s so common that some developers keep an actual rubber duck on their desks to symbolise this practice. Teams might 'joke' about needing “a duck” for the simplest bugs. Debugging is an integral part of coding, and the rubber duck technique makes it less daunting. By verbalising your thought process, you streamline problem-solving without needing external help. Frequently Asked Questions about Rubberducking Q: Does it have to be a rubber duck? Nope. While a rubber duck is the classic choice, you can use anything nearby—your coffee cup, a stapler, or even a photo on your desk. Q: What if talking out loud isn’t possible? Writing out your explanation or saying it in your head can work just as well. The key is clarifying and articulating your thought process. Q: How is this different from pair programming? Pair programming involves working alongside another person on the same task. Some people swear by pair programming, and to be honest, I've always found it effective whenever I try it. However, rubberducking is a solo activity where the act of explanation itself is the solution. Next time you're stuck on something, grab a rubber duck and give it a try. Related Ideas to Rubberducking Also see: The Feynman Learning Technique The XY Problem Bugs and releases The cost of fixing bugs Yesterday's weather Yak shaving Rubberducking is similar to the empty chair technique for psychotherapy, which involves speaking to an empty chair as if addressing a person. It's also easily confused with "rubbernecking," which is slowing down to look at an accident as you drive past—a common cause of traffic jams.

Newer

RRandom

Older