Apr 02, 2025
Most of us go about our lives with the simplest of intentions, don’t get me wrong our lives are complicated but given the choice we would rather learn by osmosis than pull an all nighter learning a complex concept. If you were to tell me that when I was a second year McMaster student, taking Economic History under the late Dr. Peter George who served as President and Vice Chancellor of McMaster University for 15 years, that I would ever use the word ‘tariff’ in a sentence later in my life, I would have told you the chances of that are slim to none!!!
Dr. George had a very commanding personality and was well versed in the content of this course as his research focused on economic history, particularly in Canadian and American contexts. He spoke of government subsidies and tariffs in and around the trade of the proverbial guns and butter. Fast forward to today, and one of the most searched terms on Google is the word ‘tariff’. Judging from this term’s significance and the uncertainty which surrounds it, maybe taking economic history including the Smoot-Hawley Tariff Act of 1930 (we all know how that turned out, the Great Depression of 1933), should be mandatory if you want to be president of the United States or a leader of any country for that matter.
My love of the science of decision making and what are barriers to how people consume goods and services was born of the teachings of Dr George, and an economist named Herbert Simon. Simon challenged the long standing belief of ‘perfect rationality’, which simply means we all possess the ability to process all relevant information, with the assumption that we have access to near perfect information and the ability to play out all the consequences of our decisions. Simon highlighted that uncertainty about the future and the ability to acquire credible information (sound familiar) leads to a limiting effect when it comes to decision-making. Simon refers to an environment where we have unlimited cognitive capacity plus perfect information leads to optimal decision making and therefore the person making the decision will always make the best possible action to achieve their goals. It’s kinda like the theory around girl math.
Then along came Daniel Kahneman, who is widely regarded as the father of the study of psychological decision-making and behavioral economics. His groundbreaking work with Amos Tversky, identified 5 different theory’s behind our economic decision making and earned him a Nobel prize in 2002. Some of these may seem familiar to you so what I decided to do was to put these theories to the test when it comes to one of the biggest economic decisions we can make - to buy and/or sell a property and furthermore, how to utilize these theories to help draw your attention to the content and practices you need to incorporate into your business to ensure success for your clients.
Loss Aversion
People feel the pain of losses more intensely than the pleasure of equivalent gains. For example, if a buyer of a condominium found out that a condo in the same building they bought in sold for less per square foot than the one they just bought they would be heart broken. Even if their real estate agent explained that the other unit had an inferior view and that they have already gained 2% in value from the time they bought until today. In other words losing $100 hurts more than gaining $100 feels good.
Do any of these loss aversion examples sound familiar?
How to Counter Loss Aversion with Tools and Content
Reference Dependence
Decisions are made relative to a reference point, what they just spent to re-shingle their roof, rather than the expectation of a buyer of not having to replace a roof right after they purchase a home. These so called gains and losses are highly guesstimated and come from different vantage points.
Do any of these reference dependence examples sound familiar?
Strategies Around Reference Dependence
Risk Preferences
It’s all about gains and/or losses, people for the most part are high risk-adverse when it comes to gains, they follow “if it’s too good to be true it ain’t worth the risk” and prefer smaller ‘for sure’ gains than larger riskier returns. As far as losses go, people are risk-averse, willing to take risks to avoid overall losses.
Do any of these risk preferences sound familiar?
Content and Tools Around Risk Preferences
Probability Weighting
People overweigh low-probability events (e.g., lottery wins, higher than normal mortgage defaults) and underweigh high-probability events which leads to prolonged and often distorted decision-making.
Do any of these examples of probability weighting sound familiar?
Content around probability weighting
Framing Effect
The way choices are presented (as gains or losses) significantly influences decisions. For instance, people may choose differently when the same outcome is framed as avoiding a loss rather than achieving a gain. The real estate industry has been built on framing, maybe too much so. Some might argue it still works, and some might say client’s see right through it.
Do any of these examples of the framing effect sound familiar?
Content and best practices around the framing effect.
What Does This All Mean?
My intention was to create real-life decision situations, which are centred around the aquisition and/or the disposition of real estate. There is no doubt that we live in an environment where information is not in short supply, but good or even great information is very scarce. There is no magic bullet content creator which fits all situations, but the information exists and can be curated for your client’s needs to fill in some of their knowledge gaps. My best advice is to operate from a place of transparency and objectivity, which may not make the so-called sale, but will increase your client’s trust in you 10 fold.