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Thinking Too Fast on Foreclosure Properties

Thinking, Fast and Slow is a book written by a psychologist who won a Nobel Prize in Economics several years back. Daniel Kahneman, the author, pokes at the basic economists’ assumption that people make rational calculations before deciding.

His idea is that all of us have two brains: calculating and impulsive. The “impulsive” reasoning is developed over years of unique personal experiences to help reduce the cost of mental calculation. But the impulsive decision, though less taxing on the brain, could lead to misjudgment at times.

Here is one real-world experiment (based on my less-than-perfect recollection, though the essence of it is on the mark). Everyone in the audience was going to receive a free gift: a small box or a large box. The small box contained, as described to the audience, a dozen beautiful porcelain plates. The big box contained 18 of the same plates but with two or possibly three plates that are broken. When asked to choose, more in the audience chose the small box. The reasoning for this “irrational” choice was that the impulsive thinking (or think fast) forced them to believe that “broken dishes” are bad and should be avoided. The think slow part, by contrast, would have concluded that 18 plates minus 2 or 3 broken ones equals 15 or 16 good plates (better than 12 plates in the small box).

Knowing that think fast is part of human nature, one direct application for real estate business is how to obtain a better price on a foreclosed property. In markets with an inventory shortage, such as in Arizona and California, any foreclosed property will draw plenty of bids. But in other slower moving markets, say Cleveland or Hartford, there are too many foreclosures in relation to potential buyers. Right marketing will make a difference. How? Well, there will be many buyers who will make “impulsive” impressions about the house. A trashcan that lies sideways brings into the subconscious mind what other bad things are hidden in the house. So a simple thing like straightening a trashcan can help with the “impulsive” thinking side of home buyers.

The following is a tabulation of the price discount applied to foreclosed property in the past year based on property condition as judged by REALTORS®.

One observes a simple common sense result of a lower discount of those properties that are judged to be in an above-average condition. But how much of that judgment is based on real factors (broken pipe) versus what is perceived by the think fast part of the brain? We should therefore be at least mindful of how all of us are prone to some degree of making impulsive impressions and decisions.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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