Are Homebuyers Rational Decision-Makers?

According to rational choice theorists, how do individuals make decisions?  Put simply, they act so as to maximize their expected utility, given their a priori preferences and some general idea of the nature of the world (by this, they mean that individuals have some idea of the probability of certain actions leading to specific outcomes).  While rational choice theory was first developed in academic disciplines such as economics, political scientists have adopted the technique and it’s use has proliferated in that discipline.  One of the criticisms of using rational choice theory to explain political phenomena is that often individuals have difficulty ordering preferences adequately.  This is because there is no single “currency” of utility in political science.  The same, however, can not be said for economics as it is much easier to order preferences when there are dollar values attached.  But what happens when time, leisure, etc., have to be taken into account.  Well, it turns out that individuals make many “mistakes” that diverge from that expected of instrumentally rational decision-makers.

Jonah Lehrer informs his readers of a fascinating series of studies done by Ap Dijksterhuis, a psychologist at Radboud University in the Netherlands.  One of these studies looks at decisions related to real estate purchases.  The studies:

look at how people shop for “complex products,” like cars, apartments, homes, etc. and how they often fall victim to what he calls a “weighting mistake”. Consider two housing options: a three bedroom apartment that is located in the middle of a city, with a ten minute commute time, or a five bedroom McMansion in the suburbs, with a forty-five minute commute. “People will think about this trade-off for a long time,” Dijksterhuis writes. “And most them will eventually choose the large house. After all, a third bathroom or extra bedroom is very important for when grandma and grandpa come over for Christmas, whereas driving two hours each day is really not that bad.” What’s interesting is that the more time people spend deliberating, the more important that extra space becomes. They’ll imagine all sorts of scenarios (a big birthday party, Thanksgiving dinner, another child) that will turn the suburban house into an absolute necessity. The lengthy commute, meanwhile, will seem less and less significant, at least when compared to the allure of an extra bathroom.

But, as Dijksterhuis points out, that reasoning process is exactly backwards: “The additional bathroom is a completely superfluous asset for at least 362 or 363 days each year, whereas a long commute does become a burden after a while.” For instance, a recent study found that, when a person travels more than one hour in each direction, they have to make forty per cent more money in order to be as “satisfied with life” as someone with a short commute. Another study, led by Daniel Kahneman and the economist Alan Krueger, surveyed nine hundred working women in Texas and found that commuting was, by far, the least pleasurable part of their day. And yet, despite these gloomy statistics, nearly 20 percent of American workers commute more than forty-five minutes each way. (More than 3.5 million Americans spend more than three hours each day traveling to and from work: they’re currently the fastest growing category of commuter. For more on commuter culture, check out this awesome New Yorker article.) According to Dijksterhuis, these people are making themselves miserable because they failed to properly “weigh” the relevant variables when they were choosing where to live. Because these deliberative homeowners tended to fixate on details like square footage or the number of bathrooms, they assumed that a bigger house in the suburbs would make them happy, even if it meant spending an extra hour in the car everyday. But they were wrong.: