Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

Housing Prices and Behavioral Economics

In traditional finance text books, assets are always priced perfectly by the cool, rational work of markets. In the real world, human behavior has a huge influence on what things sell for, particularly houses. That’s lead to an area of research called behavioral economics—the study of how people’s emotions impact their financial decisions.

A couple of weeks ago I put in an offer on a three-bedroom, bank-owned home in Pomona, California, which is about a half hour east of Los Angeles. The house was listed at $144,500. I offered $145,000. My offer was accepted this week. I was told there were two offers above mine, including one at $180,000. How did I win? I offered to pay cash. The bank that owned the property saw less of a risk of my sale not going through. Was this rational thinking on the bank’s part? Or are they making pricing mistakes just to clear out inventory as quickly as they can?

Now let’s look at the other bidders. There were sixteen offers in all. That means thirteen offers were below mine. I offered just $500 above the asking price. This is a house that sold in 2006—I kid you not—for $400,000. Why, given that 66% discount, were more people not willing to go above the asking price? Behavioral economics. Everyone wants a deal.

Lastly, let’s take a look at my thinking. A week ago I would have been happy as a clam my offer was accepted. Every bit of analysis I did showed this was just a screaming deal. But on Monday I learned that our parent company, McGraw-Hill, might sell BusinessWeek. Suddenly my future job prospects looked less certain. From an investment standpoint this purchase made perfect sense, from an emotional one? I withdrew my offer. Time will tell if I was prudent or just chicken. You can be both, I believe.

blog comments powered by Disqus