I want to talk today a little bit about the value of risk and how cities
the value of risk and how cities
the value of risk and how cities struggle when they fail to calculate the
struggle when they fail to calculate the
struggle when they fail to calculate the value of risk now the value of risk may
value of risk now the value of risk may
value of risk now the value of risk may be a strange concept but it’s one that’s
be a strange concept but it’s one that’s
be a strange concept but it’s one that’s fairly easy to understand in pretty
fairly easy to understand in pretty
fairly easy to understand in pretty simplistic mathematical terms let’s have
simplistic mathematical terms let’s have
simplistic mathematical terms let’s have a coin toss if it’s heads you get $0 if
a coin toss if it’s heads you get $0 if
a coin toss if it’s heads you get $0 if its tail’s you get $200 the value of
its tail’s you get $200 the value of
its tail’s you get $200 the value of that risk is $100 if you toss that coin
that risk is $100 if you toss that coin
that risk is $100 if you toss that coin a hundred times on average you’ll get
a hundred times on average you’ll get
a hundred times on average you’ll get $100 a toss fairly easy to understand
$100 a toss fairly easy to understand
$100 a toss fairly easy to understand the concept of the value of risk but as
the concept of the value of risk but as
the concept of the value of risk but as it turns out
it turns out
it turns out human beings have a lot of difficulty
human beings have a lot of difficulty
human beings have a lot of difficulty with that concept intuitively it’s it’s
with that concept intuitively it’s it’s
with that concept intuitively it’s it’s unnatural for humans and humans are
unnatural for humans and humans are
unnatural for humans and humans are naturally risk-averse so if you ask a
naturally risk-averse so if you ask a
naturally risk-averse so if you ask a human being I’m going to give you a
human being I’m going to give you a
human being I’m going to give you a choice a guarantee of $100 or a coin
choice a guarantee of $100 or a coin
choice a guarantee of $100 or a coin toss for 0 or $200 and variably people
toss for 0 or $200 and variably people
toss for 0 or $200 and variably people choose to guarantee hundred dollars even
choose to guarantee hundred dollars even
choose to guarantee hundred dollars even though the two have exactly the same
though the two have exactly the same
though the two have exactly the same value and in fact what psychologists
value and in fact what psychologists
value and in fact what psychologists have found is that they will choose the
have found is that they will choose the
have found is that they will choose the guaranteed choice even if the other
guaranteed choice even if the other
guaranteed choice even if the other choice has a higher value so if you tell
choice has a higher value so if you tell
choice has a higher value so if you tell a human I’ll give you a guarantee of 75
a human I’ll give you a guarantee of 75
a human I’ll give you a guarantee of 75 dollars or fifty dollars versus a coin
dollars or fifty dollars versus a coin
dollars or fifty dollars versus a coin toss that has an expected value of a
toss that has an expected value of a
toss that has an expected value of a hundred dollars they’ll take the 75 or
hundred dollars they’ll take the 75 or
hundred dollars they’ll take the 75 or fifty dollars because humans intuitively
fifty dollars because humans intuitively
fifty dollars because humans intuitively are risk averse and intuitively want to
are risk averse and intuitively want to
are risk averse and intuitively want to take the guaranteed choice now this is a
take the guaranteed choice now this is a
take the guaranteed choice now this is a problem for organizations of humans and
problem for organizations of humans and
problem for organizations of humans and particularly it’s a problem for cities
particularly it’s a problem for cities
particularly it’s a problem for cities because of course cities are nothing
because of course cities are nothing
because of course cities are nothing more than a group of humans who are
more than a group of humans who are
more than a group of humans who are making decisions often based on
making decisions often based on
making decisions often based on intuition and so
intuition and so
intuition and so it’s also a further problem for cities
it’s also a further problem for cities
it’s also a further problem for cities because cities in order to be successful
because cities in order to be successful
because cities in order to be successful in order to not fail must embrace risk
in order to not fail must embrace risk
in order to not fail must embrace risk must be progressive see cities are
must be progressive see cities are
must be progressive see cities are optional you can live in the United
optional you can live in the United
optional you can live in the United States and you must live in a state and
States and you must live in a state and
States and you must live in a state and you must be subject to the United States
you must be subject to the United States
you must be subject to the United States but you don’t have to live in the city
but you don’t have to live in the city
but you don’t have to live in the city cities are optional and still even
cities are optional and still even
cities are optional and still even though living in a city means a higher
though living in a city means a higher
though living in a city means a higher level of regulation a higher level of
level of regulation a higher level of
level of regulation a higher level of laws that you’re subject to another
laws that you’re subject to another
laws that you’re subject to another layer of government more taxes more fees
layer of government more taxes more fees
layer of government more taxes more fees and and so forth something like sixty
and and so forth something like sixty
and and so forth something like sixty plus percent of Americans make the
plus percent of Americans make the
plus percent of Americans make the affirmative choice to live in cities and
affirmative choice to live in cities and
affirmative choice to live in cities and to make themselves subject to additional
to make themselves subject to additional
to make themselves subject to additional taxes and additional fees and additional
taxes and additional fees and additional
taxes and additional fees and additional layers of government cities are optional
layers of government cities are optional
layers of government cities are optional but a lot of people make that choice and
but a lot of people make that choice and
but a lot of people make that choice and so why do they make the choice well they
so why do they make the choice well they
so why do they make the choice well they make the choice simply because cities
make the choice simply because cities
make the choice simply because cities provide things or should provide things
provide things or should provide things
provide things or should provide things the people can’t get otherwise right
the people can’t get otherwise right
the people can’t get otherwise right people want restaurants and bars and
people want restaurants and bars and
people want restaurants and bars and theaters and forming art centers and
theaters and forming art centers and
theaters and forming art centers and shops and in order to get those things
shops and in order to get those things
shops and in order to get those things they move to cities in order to be
they move to cities in order to be
they move to cities in order to be successful and to not fail and cities
successful and to not fail and cities
successful and to not fail and cities can fail they have to provide those
can fail they have to provide those
can fail they have to provide those things and those things are exceedingly
things and those things are exceedingly
things and those things are exceedingly expensive they can’t provide them on
expensive they can’t provide them on
expensive they can’t provide them on their own so in order to provide them
their own so in order to provide them
their own so in order to provide them they have to enter into partnerships
they have to enter into partnerships
they have to enter into partnerships with public and private nonprofit
with public and private nonprofit
with public and private nonprofit organizations and they have to engage in
organizations and they have to engage in
organizations and they have to engage in risk they have to be progressive the
risk they have to be progressive the
risk they have to be progressive the concept of the government that governs
concept of the government that governs
concept of the government that governs best governs least does not apply to a
best governs least does not apply to a
best governs least does not apply to a city because if you want government not
city because if you want government not
city because if you want government not to do anything you can move out to the
to do anything you can move out to the
to do anything you can move out to the county and get yourself a septic tank
county and get yourself a septic tank
county and get yourself a septic tank and it well and be free of the city but
and it well and be free of the city but
and it well and be free of the city but if you want government to do something
if you want government to do something
if you want government to do something and provide something you’re willing to
and provide something you’re willing to
and provide something you’re willing to move to the city and you’re willing to
move to the city and you’re willing to
move to the city and you’re willing to take that additional cost and those
take that additional cost and those
take that additional cost and those additional rules of zoning and
additional rules of zoning and
additional rules of zoning and regulations of land use and and
regulations of land use and and
regulations of land use and and additional taxes in order to get the
additional taxes in order to get the
additional taxes in order to get the things that cities
things that cities
things that cities provide and in order to provide those
provide and in order to provide those
provide and in order to provide those things back to where we started
things back to where we started
things back to where we started cities must take risks but as I said so
cities must take risks but as I said so
cities must take risks but as I said so these are made up of humans and humans
these are made up of humans and humans
these are made up of humans and humans are risk averse intuitively risk averse
are risk averse intuitively risk averse
are risk averse intuitively risk averse and so you see the dilemma now a case in
and so you see the dilemma now a case in
and so you see the dilemma now a case in point we’re here and my beloved city of
point we’re here and my beloved city of
point we’re here and my beloved city of Florence South Carolina see if Lawrence
Florence South Carolina see if Lawrence
Florence South Carolina see if Lawrence is a great city within the urban area of
is a great city within the urban area of
is a great city within the urban area of about 90,000 plus people and over the
about 90,000 plus people and over the
about 90,000 plus people and over the last several decades like many southern
last several decades like many southern
last several decades like many southern cities Florence saw a deterioration of
cities Florence saw a deterioration of
cities Florence saw a deterioration of its downtown downtown we’re standing and
its downtown downtown we’re standing and
its downtown downtown we’re standing and sitting in today and that downtown over
sitting in today and that downtown over
sitting in today and that downtown over the years because of economic factors
the years because of economic factors
the years because of economic factors that affected cities in the south and
that affected cities in the south and
that affected cities in the south and everywhere probably in the country the
everywhere probably in the country the
everywhere probably in the country the mall was built highways connected people
mall was built highways connected people
mall was built highways connected people left cities they moved to suburban areas
left cities they moved to suburban areas
left cities they moved to suburban areas they stopped going to the downtown and
they stopped going to the downtown and
they stopped going to the downtown and when they stopped going to the downtown
when they stopped going to the downtown
when they stopped going to the downtown it became decrepit became boarded up him
it became decrepit became boarded up him
it became decrepit became boarded up him abandoned it smelled of mold and that
abandoned it smelled of mold and that
abandoned it smelled of mold and that grano and it wasn’t somewhere people
grano and it wasn’t somewhere people
grano and it wasn’t somewhere people went and as a result the city failed
went and as a result the city failed
went and as a result the city failed failed to provide those things that
failed to provide those things that
failed to provide those things that attract people to the city and about
attract people to the city and about
attract people to the city and about five years ago city was presented with
five years ago city was presented with
five years ago city was presented with an opportunity where a set of developers
an opportunity where a set of developers
an opportunity where a set of developers were interested in building in downtown
were interested in building in downtown
were interested in building in downtown Florence among the boarded up buildings
Florence among the boarded up buildings
Florence among the boarded up buildings I knew boutique hotel with a new fine
I knew boutique hotel with a new fine
I knew boutique hotel with a new fine restaurant and they wanted to spend five
restaurant and they wanted to spend five
restaurant and they wanted to spend five to seven million dollars but they
to seven million dollars but they
to seven million dollars but they calculated how much revenue those hotel
calculated how much revenue those hotel
calculated how much revenue those hotel rooms would generate how much revenue
rooms would generate how much revenue
rooms would generate how much revenue the restaurant would generate calculated
the restaurant would generate calculated
the restaurant would generate calculated the cost of refurbishing an old building
the cost of refurbishing an old building
the cost of refurbishing an old building that they were going to go into and when
that they were going to go into and when
that they were going to go into and when they calculate the cost and they
they calculate the cost and they
they calculate the cost and they calculated the revenue they came up
calculated the revenue they came up
calculated the revenue they came up about 15 to 20 percent short they needed
about 15 to 20 percent short they needed
about 15 to 20 percent short they needed the city to mitigate that risk which
the city to mitigate that risk which
the city to mitigate that risk which amounted to be about a million dollars
amounted to be about a million dollars
amounted to be about a million dollars so they came to the city and they said
so they came to the city and they said
so they came to the city and they said you help us now the natural human
you help us now the natural human
you help us now the natural human intuition is you must be out of your
intuition is you must be out of your
intuition is you must be out of your ever-loving mind you want us you want
ever-loving mind you want us you want
ever-loving mind you want us you want this politician right to spend a million
this politician right to spend a million
this politician right to spend a million dollars of city taxpayer revenue on a
dollars of city taxpayer revenue on a
dollars of city taxpayer revenue on a hotel on Evan Street which is surrounded
hotel on Evan Street which is surrounded
hotel on Evan Street which is surrounded by deterioration and neglect and
by deterioration and neglect and
by deterioration and neglect and surrounded by a downtown that has
surrounded by a downtown that has
surrounded by a downtown that has repeated history of failures and
repeated history of failures and
repeated history of failures and everybody in town expects another
everybody in town expects another
everybody in town expects another failure you want us to take that risk
failure you want us to take that risk
failure you want us to take that risk are you crazy
are you crazy
are you crazy but we didn’t submit to that intuition
but we didn’t submit to that intuition
but we didn’t submit to that intuition it was there certainly it was there but
it was there certainly it was there but
it was there certainly it was there but we didn’t submit to it and instead what
we didn’t submit to it and instead what
we didn’t submit to it and instead what we did is we did some math and as it
we did is we did some math and as it
we did is we did some math and as it turns out as with the coin toss of 0 and
turns out as with the coin toss of 0 and
turns out as with the coin toss of 0 and $200
$200
$200 math is the answer to incorrect
math is the answer to incorrect
math is the answer to incorrect intuition right it’s pretty simple math
intuition right it’s pretty simple math
intuition right it’s pretty simple math to calculate you toss the coin 100 times
to calculate you toss the coin 100 times
to calculate you toss the coin 100 times your expected value is $100 and it can
your expected value is $100 and it can
your expected value is $100 and it can free quickly if you pay attention to it
free quickly if you pay attention to it
free quickly if you pay attention to it overcome your incorrect intuition so we
overcome your incorrect intuition so we
overcome your incorrect intuition so we started doing the math and what did the
started doing the math and what did the
started doing the math and what did the math show us
math show us
math show us well the building that we’re going to go
well the building that we’re going to go
well the building that we’re going to go into was producing an annual property
into was producing an annual property
into was producing an annual property tax revenue of about 500 bucks a year
tax revenue of about 500 bucks a year
tax revenue of about 500 bucks a year that’s the kind of condition it was in
that’s the kind of condition it was in
that’s the kind of condition it was in they were going to spin it somewhere
they were going to spin it somewhere
they were going to spin it somewhere between five and seven million dollars
between five and seven million dollars
between five and seven million dollars resulting in a property tax increase
resulting in a property tax increase
resulting in a property tax increase from $500 a year to about $100,000 here
from $500 a year to about $100,000 here
from $500 a year to about $100,000 here and we could rebate 85% of that revenue
and we could rebate 85% of that revenue
and we could rebate 85% of that revenue to them generate for them over the
to them generate for them over the
to them generate for them over the course of about seven years six hundred
course of about seven years six hundred
course of about seven years six hundred thousand dollars and still see an
thousand dollars and still see an
thousand dollars and still see an increase in our property tax from five
increase in our property tax from five
increase in our property tax from five hundred dollars to fifteen thousand
hundred dollars to fifteen thousand
hundred dollars to fifteen thousand dollars even if the project failed I
dollars even if the project failed I
dollars even if the project failed I mean if they built it they’d pay the
mean if they built it they’d pay the
mean if they built it they’d pay the property tax even if the hotel failed
property tax even if the hotel failed
property tax even if the hotel failed and they never had a single customer
and they never had a single customer
and they never had a single customer that revenue would still be there for
that revenue would still be there for
that revenue would still be there for the city
the city
the city and they were going to have a hotel
and they were going to have a hotel
and they were going to have a hotel which means they were going to spend a
which means they were going to spend a
which means they were going to spend a significant amount of water and sewer
significant amount of water and sewer
significant amount of water and sewer now it’s not unusual if a if the hotel
now it’s not unusual if a if the hotel
now it’s not unusual if a if the hotel was going to build on the edge of town
was going to build on the edge of town
was going to build on the edge of town and they want us to extend water and
and they want us to extend water and
and they want us to extend water and sewer lines we could calculate pretty
sewer lines we could calculate pretty
sewer lines we could calculate pretty effectively how much the water and sewer
effectively how much the water and sewer
effectively how much the water and sewer line extension would cost the city how
line extension would cost the city how
line extension would cost the city how much revenue would be generated by the
much revenue would be generated by the
much revenue would be generated by the water and sewer usage from the customer
water and sewer usage from the customer
water and sewer usage from the customer if those numbers come to one to one we
if those numbers come to one to one we
if those numbers come to one to one we do it every day well we can calculate
do it every day well we can calculate
do it every day well we can calculate with pretty convincing accuracy how much
with pretty convincing accuracy how much
with pretty convincing accuracy how much water and sewer revenue would be
water and sewer revenue would be
water and sewer revenue would be generated by that hotel and so we did
generated by that hotel and so we did
generated by that hotel and so we did and it was well over the amount of
and it was well over the amount of
and it was well over the amount of expenditure they were expecting from us
expenditure they were expecting from us
expenditure they were expecting from us and even like I said if they never
and even like I said if they never
and even like I said if they never generated water and sewer revenue but
generated water and sewer revenue but
generated water and sewer revenue but still you had the property taxes that
still you had the property taxes that
still you had the property taxes that would be generated over the years and we
would be generated over the years and we
would be generated over the years and we would very quickly recoup our expense
would very quickly recoup our expense
would very quickly recoup our expense the risk was very effectively minimal
the risk was very effectively minimal
the risk was very effectively minimal the result if successful indirect
the result if successful indirect
the result if successful indirect financial terms was strong but
financial terms was strong but
financial terms was strong but ineffective the community was even
ineffective the community was even
ineffective the community was even stronger and in effect we made the I
stronger and in effect we made the I
stronger and in effect we made the I think right decision we calculated the
think right decision we calculated the
think right decision we calculated the risk we took the risk and in the seven
risk we took the risk and in the seven
risk we took the risk and in the seven five seven years since there’s been
five seven years since there’s been
five seven years since there’s been nearly two hundred million dollars
nearly two hundred million dollars
nearly two hundred million dollars expended and the two or three block area
expended and the two or three block area
expended and the two or three block area surrounding that hotel including the
surrounding that hotel including the
surrounding that hotel including the little theater today so I think the
little theater today so I think the
little theater today so I think the moral the story is we do a disservice to
moral the story is we do a disservice to
moral the story is we do a disservice to ourselves sometimes when we listen to
ourselves sometimes when we listen to
ourselves sometimes when we listen to our intuition and don’t do the math we
our intuition and don’t do the math we
our intuition and don’t do the math we miss value risk and if a city is going
miss value risk and if a city is going
miss value risk and if a city is going to be successful we have to value risk
to be successful we have to value risk
to be successful we have to value risk correctly and engage in it and it’s my
correctly and engage in it and it’s my
correctly and engage in it and it’s my hope and dream that we’ll continue to do
hope and dream that we’ll continue to do
hope and dream that we’ll continue to do so thank you for your time today
”
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