In today's economy, it seems like everything is falling—stocks, home sales, and consumer confidence, to name a few. And that which is rising isn't what we want to see going up—unemployment, foreclosures, and the amount of money shelled out by Uncle Sam for bailout purposes.
But the positive spin on negative numbers is something those in many industries have become accustomed to as of late. As Larry Mizel, CEO of M.D.C. Holdings and chair of Big Builder '08, said to the crowd gathered at the conference's opening night on Nov. 3, “GM sales are down 47 percent for the month. I guess they had a good month.”
Gone are the days of buyers lining up at new-home communities and lender offices, and industry's leaders are deciphering the supports that will hold up the market moving forward: stimulus packages, curtailing foreclosures, and injecting trust back into consumers' minds.
Dan Ariely, professor of behavioral economics at MIT, opened the evening's Economic Roundtable with a keynote address regarding the predictable ways in which consumers behave irrationally—a point he was able to later link to comments made by fellow panelists Eric Belsky, executive director at Harvard University's Joint Center for Housing Studies, and Tom Block, senior vice president for government relations at JPMorgan.
When people are given too many complex options, according to Ariely, they tend to shut down or walk away because making a decision is too difficult. But if a question is posed correctly, the seller has a greater control over the outcome.
An example offered by Ariely was a study in which participants in one group were presented with the choice of (A) an all expenses paid trip to Paris, (B) an all expenses paid trip to Rome, or (C) having their car stolen, while a second group was given the choice of (A) an all expenses paid trip to Paris, (B) an all expenses paid trip to Rome, or (C) an all expenses paid trip to Rome, but they could not drink coffee on their trip.
Participants in the first group had a very difficult time making a decision; while A and B were both clearly better than C, there was no distinct benefit of Paris over Rome or vice versa. In the second group, however, there was a clear relationship between B and C, and Rome with coffee was obviously preferable to Rome with no coffee, so participants overwhelmingly selected B as their preference—even though the relationship between A and B remained unchanged across the two experimental groups. Thus, simply altering the phrasing of a question can influence the answer.
In the housing market, Ariely pointed out that there are strong penalties associated with a foreclosure, but that buyers were not given the proper tools to figure out how much they should take out for a mortgage. A calculator tool that determined what they could afford to pay, as opposed to the maximum they could qualify for, was never available, which ultimately contributed to a sharp increase in foreclosure activity.
Ariely's comments had a particular resonance in light of the current housing crisis, and such thoughts of uncertainty were continually paralleled throughout the evening in regards to what it will take to bring the market back.
