One way to understand the collapse of the real estate bubble {andour current financial mess} is as a massive case of baddecision-making. The mistakes, of course, were made by many differentpeople and organizations: the investment banks who bought subprimedebt, the credit rating agencies who gave that debt high ratings, themortgage brokers who gave out shady loans to people with bad credit,etc. But, in the end, the bubble really began when lots of people choseto buy the wrong home. They bought homes that were too big and tooexpensive, fueling an unsustainable boom in new home construction. Theytook our mortgages they couldn`t afford.Ap Dijksterhuis, a psychologist at Radboud University in theNetherlands {and expert on unconscious thought}, has done some cool studiesthat look at how people shop for "complex products," like cars,apartments, homes, etc. and how they often fall victim to what he callsa "weighting mistake". Consider two housing options: a three bedroomapartment that is located in the middle of a city, with a ten minutecommute time, or a five bedroom McMansion in the suburbs, with aforty-five minute commute. "People will think about this trade-off fora long time," Dijksterhuis writes. "And most them will eventuallychoose the large house. After all, a third bathroom or extra bedroom isvery important for when grandma and grandpa come over for Christmas,whereas driving two hours each day is really not that bad." What`sinteresting is that the more time people spend deliberating, the moreimportant that extra space becomes. They`ll imagine all sorts ofscenarios {a big birthday party, Thanksgiving dinner, another child}that will turn the suburban house into an absolute necessity. Thelengthy commute, meanwhile, will seem less and less significant, atleast when compared to the allure of an extra bathroom. But, asDijksterhuis points out, that reasoning process is exactly backwards:"The additional bathroom is a completely superfluous asset for at least362 or 363 days each year, whereas a long commute does become a burdenafter a while." For instance, a recent studyfound that, when a person travels more than one hour in each direction,they have to make forty per cent more money in order to be as"satisfied with life" as someone with a short commute. Another study,led by Daniel Kahneman and the economist Alan Krueger, surveyed ninehundred working women in Texas and found that commuting was, by far,the least pleasurable part of their day. And yet, despite these gloomystatistics, nearly 20 percent of American workers commute more thanforty-five minutes each way. {More than 3.5 million Americans spendmore than three hours each day traveling to and from work: they`recurrently the fastest growing category of commuter. For more oncommuter culture, check out this awesome New Yorkerarticle.} According to Dijksterhuis, these people are making themselvesmiserable because they failed to properly "weigh" the relevantvariables when they were choosing where to live. Because thesedeliberative homeowners tended to fixate on details like square footageor the number of bathrooms, they assumed that a bigger house in thesuburbs would make them happy, even if it meant spending an extra hourin the car everyday. But they were wrong.Obviously, this don`t address the mortgage issue, or why people took out so many subprime loans. {I bloggedabout that several months ago.} But I think they do demonstrate howpeople often make bad decisions when making important decisions,precisely because they assume that thinking more is always better.Conscious thought, however, comes with its own biases and frames and,when we`re buying a home, those biases can lead to some big mistakes. For more on the dangers of thinking too much, check out a few of Timothy Wilson`s papers, especially this one.
scienceblogs.com/cortex/2008/07/buying_the_wrong_house.php