Saturday, 9 May 2015

No, people are not that stupid

Emailed in by MBK from The Times

Ap Dijksterhuis, the Dutch psychologist, once famously conducted research which showed that people often underestimate the effect of commuting when buying property.

When given two properties to choose from, a three-bedroom flat located in the centre of a city that would give them a ten-minute commute, and a five-bedroom house in the suburbs that would require a 45-minute commute, most people chose the big house, because it’s easier to conceptualise quantifiable facts, such as an extra room, than future emotions, such as how you’ll feel when you’re stuck in a long traffic jam on the commute home.

But maybe some psychologists are.

He didn't need to ask people, all he had to do was look at the relative prices of a three-bed city centre flat and a five-bed house in the suburbs, as in "what people are prepared to pay in real life after having thought about it long and hard".

Selling prices are the best measure of people's preferences; the two homes mentioned sell for similar amounts; therefore on the whole, people make their own trade-off between saving 35 minutes commute and all the extra space and by and large, decide that they are of equal value. People do not automatically prefer the larger home in the suburbs.

This is why the average selling price of all flats in England & Wales is the same as the average selling price of all semi-detached houses - because flats are in city centres where the location is much more favourable and the land correspondingly expensive.


James James said...

You're missing the point here Mark. Yes, he's aware that people will pay more for land in the centre. What he's arguing is that people are systematically biased -- that they would be happier if they paid more for land in the centre. So looking at revealed preferences doesn't refute that, because he's arguing that people are not acting in the way that will make them happiest.

Mark Wadsworth said...

JJ, no you are being too kind to him.

People do what makes them happiest.

Everybody has an upper limit to their housing budget and makes the trade off between convenience and living space.

I am genuinely quite happy commuting an extra 35 minutes in exchange for having plenty of space and a big garden to sit in evenings and weekends. Other people prefer living in the city. Others prefer living out in the countryside.

Each to his own.

Lola said...

The psycho blokey has got it 100% arse about face. Why am I not surprised? The same idiocy applies to the use of 'behavioural economics' by government generally (and the FCA particularly). Idiots cubed.

Random said...
Labour going in wrong direction.

A K Haart said...

As a scientist the psychologist should have understood that price is the best way of measuring what he is supposedly studying. No good for a psychology paper though.

Mark Wadsworth said...

L, that's another good example.

R, serve them right.

AKH, exactly. Economics and pricing is largely about psychology. Why do people prefer some things to other similar things, even though the price is much higher? Like, why would anybody ever buy a new car? Mystery to me.

L fairfax said...

However why do you think some London suburbs e.g. Bromley are so much cheaper than others e.g. Surbiton despite in many ways being identical.
(The trains are probably better in Bromley).

Random said...

MW, a lot down to status.

Mark Wadsworth said...

LF, nobody really knows, but as i asked myself: "said Why do people prefer some things to other similar things, even though the price is much higher?"

As R says, it is probably snob value. People like living among their peers, so if there are more wealthy people in suburb S than in suburb B, this means that other wealthy people prefer S, so they outbid middle earners and push up prices in S, so middle earners default to B, and so on.

Also known as 'agglomeration'.

Lola said...

MW. I don't think economics and pricing are about psychology. That's just the problem. the BE people think exactly that. I think that e and p are about preferences. E.G. Even if I was very rich I wouldn't be seen dead in a ditch with a new Ferrari - and I like cars. It's this wonderful variability of mankind's preferences that utterly confounds all forms of central planning, and renders BE useless for guiding and deciding public policy. People are all 'rational', but rational relative to their own preferences.

Mark Wadsworth said...

L, I don't think we are disagreeing. Perhaps it was incorrect of me to use the words 'psychology'.

What I meant was was everybody has his own preferences, which are quite different to other people's.

Although the overall outcome is pretty clear (the real life example of the trade off between convenience and living space), why one individual does A and other person does B will always remain a mystery.

Lola said...

'remain a mystery'. Precisely. Hence central planning will always fail.

James James said...

"No, people are not that stupid"
"People do what makes them happiest."

These assertions are basically denials that cognitive biases exist. Not so -- cognitive biases do exist, and people do not always do what makes them happiest.

Random said...

MW, isn't that gentrification?
"Also known as 'agglomeration'."
Correct me if I am wrong but agglomeration is the Eiffle Tower/cafe near the tower thing.

Random said...
This comment has been removed by the author.
Lola said...

JJ That link basically confirms MW's point. It also does not factor in that someone will endure extra suffering to make someone else happier. In this instance it may be that the commuter chooses the pain of extra commuting time in order that his (her?) family can enjoy a bigger house. I do not think that is evidence of cognitive bias.

Mark Wadsworth said...

JJ, I was generalising. Sometimes people make mistakes, obvs.

R, don't split hairs. Both are self-reinforcing cycles.

L, ta for back up.

James James said...

Mark, cognitive biases are not just "sometimes people make mistakes". They are ways in which people systematically make mistakes. If the mistakes were random, then they would tend to cancel out, but with cognitive biases they are not random.

"A cognitive bias is a pattern of deviation in judgment"
"Cognitive biases are tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgment"

In the case of commuting, if the mistakes were random, then some people would mistakenly think they'd prefer to pay less with a longer commute and some people would mistakenly think they'd prefer to pay more with a shorter commute, and there would be no overall effect on house prices -- the mistakes would cancel out.

But Dijksterhuis's claim is that most people mistakenly underestimate their value of a shorter commute. There is a net effect on house prices: central housing is less expensive than it would be and suburban housing is more expensive than it would be.

James James said...

Lola, those are both red herrings. Nobody's disputing that there is a trade-off between a shorter commute and a more expensive house. And yes, with a fixed amount of land "someone will endure extra suffering to make someone else happier" but as I state in my previous comment, without the cognitive bias, relative land prices between the centre and the suburbs would be different.

If you want evidence of the cognitive bias:

James James said...

From the abstract:

"According to economics, the burden of commuting is chosen when compensated either on the labor or on the housing market so that individuals’ utility is equalized. However, in a direct test of this strong notion of equilibrium, we find that people with longer commuting time report systematically lower subjective well-being."

If lower house prices in the suburbs compensated adequately for longer commutes, then subjective well-being ought to be the same for people with different commutes, but they don't so it isn't.

James James said...

Suburban house prices would have to fall more and central house prices rise more before subjective well-being is equalised for people with long commutes vs short commutes.

Lola said...

JJ. the analysis is still the wrong way round.

Dinero said...

James James

Its possible that the higher well being quotient was a cause of the choice rather than an effect of the choice.

James James said...

"It's possible that the higher well being quotient was a cause of the choice rather than an effect of the choice."

Now that's the first interesting argument.