How Are Your Buying or Selling Decisions Really Made?

"Predictably Irrational" sounds like a book about the real estate market. But it’s not, at least not directly. It is certainly relevant reading for real estate agents, brokers, and managers. The full title of the book is Predictably Irrational: The Hidden Forces That Shape Our Decisions (HarperCollins, 280 pp.). It is written by Dan Ariely who holds a joint appointment at MIT between the Media Laboratory and the Sloan School of Management. He is one of that relatively new breed, a behavioral economist.

While not every insight in this book would have a direct application to real state, some come pretty close. Consider this passage from the chapter, “The Truth about Relativity”:

Suppose you’re shopping for a house in a new town. Your real estate agent guides you to three houses, all of which interest you. One of them is a contemporary, and two are colonials. All three cost about the same; they are all equally desirable; and the only difference is that one of the colonials (the “decoy”) needs a new roof and the owner has knocked a few thousand dollars off the price to cover the additional expense.

So which one will you choose?

The chances are good that you will not choose the contemporary and you will not choose the colonial that needs the new roof, but you will choose the other colonial. Why? Here’s the rationale (which is actually quite irrational). We like to make decisions based on comparisons. In the case of the three houses, we don’t know much about the contemporary (we don’t have another house to compare it with), so that house goes on the sidelines. But we do know that one of the colonials is better than the other one… Therefore we will reason that it is better overall and go for the colonial with the good roof, spurning the contemporary and the colonial that needs a new roof.

Ariely fills this chapter with examples and experiments that show how our decisions and expressed preferences demonstrate “the problem of relativity – we look at our decisions in a relative way and compare them locally to the available alternative.”

What do you think? Are your decisions sometimes made according to "behavioral economy?"

Thanks to Bob Hunt of C.A.R. for this article