Decision Making and Rationality – Part 3

For the past few weeks we’ve been looking at data from a survey I conducted with Influence PEOPLE readers. My goal in doing the survey was to understand how people make decisions. If you’d like to know more about the survey background click here. This week we’ll continue to explore some interesting things about how people make decisions.

Question 6 on Survey A had to do with selling your home. I realize there’s a lot to consider when selling a home but nonetheless the question read as follows: You bought your home for $189,000. At the peak of the housing market it was appraised for $279,000, so even though you don’t have to move you decided to try to sell it. With the recent market all prices have come down. You’re offered $212,000. Will you sell?

Under these circumstances 77% declined to sell.

On Survey B the question was essentially the same except the peak value was much lower: You bought your home for $189,000. At the peak of the housing market it was appraised for $229,000, so even though you don’t have to move you decided to try to sell it. With the recent market all prices have come down. You’re offered $212,000. Will you sell?

In this economic scenario 53% of people said they would sell.

Here’s the point: If you take another look at the questions you’ll see the selling price is the same in both cases, $212,000, which means the profit is the same on each sale. The difference is what people thought their house was worth during the housing bubble. It’s a classic “compared to what” situation and loss aversion. People who thought their house was worth $279,000 at one time are very, very reluctant to sell. As I noted last week, the same thing happens with stocks when people hang on to losing stocks hoping they’ll rebound.

In the second survey with the peak price being much lower made people feel less pain thinking about what they might have gotten and as a result more than twice as many were willing to sell when compared to Survey A. Knowing the housing market was over inflated due to bad loans shouldn’t the real question be; is a $212,000 selling price a good return on an $189,000 home? Take the comparisons out and people make very different decisions.

Question 7 on Survey A went like this: You’re playing a game and you’re given $100 to share with the person you’re playing with. Between the two of you, you get to keep the $100 no matter how you choose to split it. What would you give to the other person?

On Survey B the question was: You’re playing a game and your partner was given $100 to share with you. Between the two of you, both get to keep the $100 no matter how they split it. How much would the other person have to give you to for you to consider it a fair split?

On Survey A the average response was $50.38 and on B it was $47.76. As you can imagine the vast majority of people put $50 on both surveys (87% on Survey A and 84% on Survey B) as being the fair amount.

Here’s the point: We have an ingrained idea that “fair” is an equal split when in reality, if you were given $100 and could share that amount however you wanted, anything you would give to someone else would make them better off. Just because you had the luck of the draw so to speak does that mean everyone should have such luck? Regardless, it’s apparent what people call fair usually means equal shares for all, so you’d do well to keep that in mind when sharing.

Next week we’ll conclude our look at the survey results and implications for you when it comes to understanding how people make decisions.