Summary: Behavioral Finance And Real Estate

Read the summary and the most important questions on Behavioral Finance and real estate

• 1 Introduction to managerial decision making

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• What is behavioral finance?

  The study of how psychological phenomena impact financial behavior and markets

• What is behavioral finance and real estate?

  Intersection between both. The dynamics at markets and the behavior of actors

• What kind of view can you have on market efficiency?

  1. Efficient market fanatic
     
  2. Behavioral fanatic
  3. Sensible middle ground

• Cross-fertilization, do both field help each other?

  • Various types of actors 
    
  • Many different kinds of decisions
  • Differences in expertise and experience
  • Stakes often large
  • Research hindered by unknowns, lack of control

• Examples of combination of the fields

  • Overheated housing markets
    
  • Are your going to rent or buy a house?
  • Mortgage choice
  • Price negotiations
  • Real estate appraisal
  • Land lease and house prices

• 1.1 Two thinking systems

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• How can people be simultaneously smart and dumb?

  Distinction between two types of thinking
  

  1. System 1: intuitive and automatic (fast thinking)
  2. System 2: reflective and deliberate (slow thinking)

• 2 Overconfidence and optimism

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• Are overconfidence and optimism beneficial?

  Overconfidence and optimism blamed for serious problems: 
  

  • Wars, fatal accidents, wrongful convictions
    
  • Stock market bubbles, unnecessary lawsuits, overleveraging and bankruptcies, excessive trading in securities, failed mergers and acquisitions
  • Poker, being poorly prepared for the exam

• What can we conclude from the research from Fischhoff et al. (1977)? (grafiek met groene diagonaal)

  Lines are right from the green line, so people expected they were more right than they actually were --> overconfidence

• What are possible explanations for this overconfidence?

  • Hindsight bias: tendency for people with outcome knowledge to believe falsely that they would have predicted the outcome
    
  • Desire to feel sure of ourselves
  • Desire to make others feel sure about us: being accurate comes at the expense of being informative, and others often prefer informativeness over accuracy
  • Confirmation bias
  • Representative biases
  • Anchoring

• Are real estate appraisers well calibrated?

  Study: Gijsbers and van den Assem (2019)
  
  

  • They asked 20 certified real estate appraisers their 90% confidence interval for the transaction price of 10 houses throughout the  Netherlands
  • Result: 55% it was outside the confidence interval
  • Expertise doesn't solve the overconfidence problem. They have more information and experience but this isn't in proportion with the expected higher accuracy.