Sumi (my lovely wife) and I are currently house hunting. So we've been thinking about how difficult it is to calculate the optimal amount of money we should spend on a house. And how much of it should we take as a mortgage? To work this out, we need to take into account our current income, our expected future income, our predictions for the stock market and the housing market, and the interest rate of mortgages today and in the future. On top of that, we need to consider the amount of happiness different houses will provide us, and how that level of happiness measures up against the lifetime costs of these homes. Forty-one years of education between us does not seem to be enough to figure this out.
So what did we do? We realized that figuring this out rationally was a lost cause. We relied on some simple but arbitrary factors. We picked a neighborhood that we liked a lot. We found the house that we liked the most within this neighborhood. Then we offered to buy it for $10,000 less than the asking price. I think that the owners of that house could have asked for $100,000 more or $100,000 less than their current price, and we would have still offered them just a bit less than their asking price.
This ordeal is clearly not a rational decision-making process, ... but at least we are now closer to having a home.
–Dan Ariely is a behavioral economist whose work has appeared in Business 2.0, The Wall Street Journal, Scientific American, CNN, and NPR. For more info, visit www.predictablyirrational.com.
Event Spotlight: Big Builder '08
Author of the New York Times best selling book Predictably Irrational: The Hidden Forces that Shape Our Descisions, Dan Ariely will kick off Big Builder '08 on Nov. 3 with a keynote address providing unique insights into buyer psychology.
The first and only person to hold joint appointments at MIT's Media Lab and the Sloan School of Management, Ariely is a visiting professor at Duke University, as well as a founding member of the Center for Advanced Hindsight.
More than simply a place for answers, Big Builder '08 is an interactive forum where you'll find innovative and strategic ways to approach the challenges you face in an ever-changing business landscape. This highly focused leadership event is a must for industry executives and their teams as they lead their companies through the downturn.