Neuroscience and your decisions
In How We Decide, Jonah Lehrer relates how the wording of a question can draw opposite answers from a large sample of medical doctors.
One group was asked:
The US is preparing for the outbreak of an unusual Asian disease. It is expected to kill 600 people. Two different programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs are as follows:
If Program A is adopted, 200 people will be saved. If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved.
Which of the two programs would you favor?
Of a large sample of physicians, 72 percent chose program A, the safe and sure option.
However when the same question was asked like this:
If Program C is adopted, 400 people will die. If Program D is adopted, there is a one-third probability that no one will die and a two-thirds probability that 600 people will die.
Which of the two programs would you favor?
Of a large sample of physicians, 78 percent chose program D, the risky strategy.
By changing of the wording - whether focusing on the possible saving of patients versus focusing on the death of patients - doctors can be manipulated into choosing a riskier strategy to avoid death (loss.) Doctors are good at science and math…
Doctors aren’t the only ones who are good at math but have loss aversion. Harry Markowitz, the Nobel Prize-winning investment portfolio theorist, splits his personal portfolio into stocks and bonds. His own mathematically brilliant advice favors stocks over bonds. Higher rewards have higher risk, more volatility, and intermittent loss. His little neurons didn’t like it and neither do most people’s.
So, what’s this got to do with real estate? Everything!
I am leery of all the data-slinging in the media and frequently on this blog. Buyers and sellers need to look at the way information is presented, look at the mirror-image way to see it, and then make a decision that is not clouded by manipulation.
Take these facts as examples:
Return on Investment data for January 1, 2000 to February 1, 2011: (source: MSN Money.com Case Shiller)
Dow +10.1 percent
S & P -6.5 percent
NASDAQ -30 percent
real estate +43.9 percent
Do you get an immediate reaction to that deep negative -- 30 percent -- for the NASDAQ? Does that NASDAQ number make your want to run and check your investments? Get out of NASDAQ investments, now, if not three years ago? Brain chemicals are calling to you to run where the numbers are positive. There is fear and regret about money you’ve flushed in those negative investments.
Here’s a hypothetical flips side:
The cost of investing in the following vehicles has changed in these proportions from January 1, 2000 to February 1, 2011:
Dow +10.1 percent
S & P -6.5 percent
NASDAQ -30 percent
real estate +43.9 percent
Ah! Now we see where the inflation lies. Inflation is a bad word, but appreciation and ROI are happy words. See how the investments to be afraid of just shifted?
One more thing, the time period for this statement is ten years, when real estate was doing well (Blows the doors off everything else.) Your critical mind should want to know what the shorter-time figures look like.
Can you see how easily words can change the “meaning” of numerical "fact"? What do you do to engage your critical mind while your dopamine receptors are jumping?
