Ignore Your 'Lizard Brain'

It's just so gratifying to read a magazine that used to be so "rah-rah, go housing; housing never goes down" now saying many of the things we bubble bloggers have been saying for so long now. The bubble really must be bursting. And the seller's amygdalas must really be working overtime now.

Anyway, here are some more "New Rules" care of Business Week (these are just so obvious but better late than never):

No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks. Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors. If your brother-in-law made a killing in real estate, you're determined to do the same. "So much of what drives the housing market is human interpersonal dynamics," says Yale University economist Robert J. Shiller.

1. Avoid the Herd

A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset: "You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind," says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they? ...The rewards of thinking independently can be high.

2. A Small Loss Today is Much More Preferable to a Greater Loss Tomorrow

In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call "loss aversion," which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices. Even owners who stand to make a big profit on a sale often set the price too high. In this case the mental error isn't loss aversion but outdated thinking.

3. Avoid Chasing the Market Down

The gravest danger of dragging your heels on price cuts in a sinking market is that you can "follow the market down," never managing to sell because your price is always just a little too high, says Christopher J. Mayer, a Columbia Business School economist. He and David Genesove of Hebrew University in Jerusalem found that when prices were falling in Boston in the early 1990s, two-thirds of the houses that came on the market were eventually withdrawn without a sale.

4. Don't Be Overconfident

In parts of the country where the market is still strong, a common sin continues to be overconfidence. Owners typically don't seriously consider a wide enough range of potential housing market outcomes, including the possibility of a steep decline. That leads people to take more risks than they should.

5. Don't Fall into the Trap of Thinking that Renting Makes You a 'Second-Class Citizen'

Rent-vs.-buy decisions are a perfect example of what the housing market can learn from behavioral economics. If financial efficiency were all that mattered, more people would be renting nice houses instead of buying them, even taking into account the home mortgage-interest deduction.

Especially in upscale communities, social pressure to buy is intense. Jonathan Miller, CEO of real estate appraiser Miller Samuel Inc., recalls that when he and his family moved to upper-crust Darien, Conn., 15 years ago and rented for a year, "we were absolutely second-class citizens. It was very unpleasant."

In many markets the total monthly costs of renting are far below the total monthly costs of owning the same property -- 62% cheaper in San Diego, for example, according to Boston-based Torto Wheaton Research, a unit of property manager CB Richard Ellis Group Inc. So you owe it to yourself to be aware that your castle thinking can be a costly predilection.

6. Don't Rely on Your Lizard Brain

Neuroscientists have even discovered the place in your brain that makes you spend too much on a house. Far from behaving perfectly rationally, real people are pushed and pulled by signals emanating from below the neocortex -- the primitive "lizard brain." That may be why there are so many homes with empty marble foyers, faux Roman columns, dust-collecting Jacuzzis, and exotic drooping conifers on the lawn.

7. Re-think the Whole Marin Wannabe Aristocracy Thing

What people can do is be aware of their human tendency toward status-seeking.

8. Avoid the Tangibles vs. Intangibles Fallacy

A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment...To find your moorings, try to focus on the fundamental factors that determine value.