ECONOMISTS ARE PEOPLE TOO. JUST MORE RATIONAL?

There was really interesting article in Sunday’s New York Times. The title of the article is “A Reality Check for Home Sellers”. The lead paragraph from the story, reprinted below, sums it up.

ECONOMISTS and other humans don’t always see eye to eye. “Economists tend to think people are crazy because they won’t sell their houses for less than they paid for them — and people think economists are crazy for thinking things exactly like that,” said Professor Christopher Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School and an authority on real estate economics.

CHILL ON THE MARKET TURNS TO A DEEP FREEZE AS SELLERS OVERPRICE HOMES.

With house prices falling in many markets around the nation, this particular quirk of the human psyche might end up costing the economy a great deal, Professor Mayer says.

Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove, a professor of economics at the Hebrew University in Jerusalem, studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all.

BEHAVIORAL ECONOMICS EXPLAINS BEHAVIOR THAT CLASSICAL ECONOMICS CANNOT. PEOPLE (AS ECONOMIC ACTORS) CAN BE IRRATIONAL.

The Author sometimes posts on behavioral economics and finds the topic interesting. It can also be lucrative as a methodology to uncover inefficiencies in markets and take advantage of bargains. For example, a post from July addresses irrational economic behavior noted in testosterone-suffused men, “DOES TESTOSTERONE SKEW ECONOMIC DECISION MAKING? (Hint: Consider the fact that testosterone skews every other field of decision making.)”. This phenomenon of overpricing houses in depressed markets illustrates “loss aversion”.

In classical economics, that’s not supposed to happen, but the episode did comport with the behavioral economics theory of loss aversion: people have a visceral — some might say “irrational” — hatred of losing money. They try to avoid doing so, even when it goes against their own best interests.

EVERYTHING IS PRICED TO SELL IN THE DESERT OF THE REAL!