When Not To Buy A House
Finweek English|18 April 2019

About to make a big decision? Research shows it might be best to wait for a cool day.

Johan Fourie
When Not To Buy A House

Economists now know that humans are not rational agents, maximising our utility every moment of every day. We make poor decisions, often choosing the less efficient outcome – and we often do so predictably. We don’t want to give up something even though we’d be unlikely to buy it at that same price (loss aversion effect). We tend to overestimate the likelihood of events which we recall more easily, which can be influenced by how recent, unusual or emotionally charged the memories are (availability heuristic).

We place a disproportionately high value on objects that partially assemble themselves, like furniture from IKEA, regardless of the quality of the end result (known as the IKEA effect).

These predictably irrational behaviours have spawned an entire subfield of economics – behavioural economics – which has been applied to all sectors of society, from high finance to, well, whether we buy a half-built IKEA cupboard.

But sometimes our behaviour is affected by biology rather than psychological biases. When we are hungry or tired, we make poorer decisions. One influential study used court records to show that people are less likely to get bail just before lunch, when the judge is more likely to be hungry. This shouldn’t happen in a world of utility-maximising agents.

It’s perhaps not that surprising that hunger or fatigue affects our decision-making ability. The age-old adage of ‘sleep on it’ exists for a reason. Yet economists are increasingly finding that things we may never have considered to be important when making decisions – real-world, important decisions – may matter, a lot.

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