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Million Dollar Listing, Bravo’s high-drama reality show about luxury Los Angeles real estate, features an agent who frequently uses anchoring with his clients. He uses a simple tactic to convince them that he got the best possible deal on a house (selling or buying). Rather than leading with the final deal, he first tells them the starting point of the negotiation, which they usually don’t like. He then explains how he landed a better deal for them. Here he is putting this tactic into action with an elderly woman selling her condo. The scene starts at minute 10:15 and ends at 11:30.

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One of the strange parts of the home buying process is how impersonal it can be if you let it. Sure, prospective homeowners visit homes in neighborhoods they might like to live and give agents a list of things they want in a house (open floor plan, garage, large yard, X number of bedrooms, etc.). The items on this list of “wants” are all about the house itself. Yet, what determines someone’s eventual satisfaction from the house itself is how one or some of those parts interact with a person’s lifestyle and behavior. From the New York Times:

When Ed Diener, a psychology professor at the University of Illinois and a former president of the International Positive Psychology Association — which promotes the study of what lets people lead fulfilling lives — was house-hunting with his wife, they saw several homes with features they liked.

But unlike couples who choose a house because of its open floor plan, fancy kitchens, great light, or spacious bedrooms, Professor Diener arrived at his decision after considering hedonic-adaptation research.

“One home was close to hiking trails, making going hiking very easy,” he said in an e-mail. “Thinking about the research, I argued that the hiking trails could be a factor contributing to our happiness, and we should worry less about things like how pretty the kitchen floor is or whether the sinks are fancy. We bought the home near the hiking trail and it has been great, and we haven’t tired of this feature because we take a walk four or five days a week.”

How do real estate agents try and help increase the odds of these kind of successful matches?

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About ten years ago, a pair of economists published a study on loss aversion in the residential housing market (gated version here). Homeowners, they found, held out for more money, about 25-35 percent above the expected selling price, and ended up paying for it — either by not selling or by having their property languish on the market for months before a sale. But is that so unexpected? These were just regular homeowners.

In a new study of commercial real estate, Sheharyar Bokhari and David Geltner of MIT find that supposedly sophisticated commercial investors exhibited similar degrees of loss aversion during the recent housing bubble. In fact, the more sophisticated the investor, the larger the loss aversion, they find. The consequence to the investors was the same. More money spent (lost) in making a sale because of how much longer their property sat on the market.

Despite loss aversion at the individual level, the authors do not find that it had much impact at the market level. In other words, its impact on average transaction prices and trading volume during the boom and bust was minimal. So both behavioralists and neoclassicalists can take comfort when they read it.

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For readers interested in Thaler’s Sunday column in military base land policy, another interesting case study that most economists would probably shake their heads at is the Navy’s Oceana air station in Virginia Beach. The Navy first acquired the land for the base in 1940 and it has since become one of the most advanced air stations in the world with about 12,000 people working on site. Virginia Beach is a strong military community with plenty of attractive oceanfront property that has seen its share of economic and population growth in the last half century, thanks in no small part to the military’s large presence. Home values in the Norfolk, Virginia, area where Virginia Beach is located have almost tripled in the past 20 years, while land values have more than tripled.

It’s not really clear how valuable Oceana is or what private developers might do with it. The two sides would have to sit down and figure it out. There’s little chance of that happening since the Navy likes the site very much. It has moved more jets there in recent years and has talked about making it a master jet base. So the Secretary of Defense didn’t propose closing it in the 2005 BRAC round. The BRAC commission thought otherwise, though, adding it to the list because of encroaching economic development. The military acknowledges that there is a risk of F-14 and F-18 jets crashing into nearby neighborhoods. Plus, the noise associated with planes has been the subject of citizen ire and even a lawsuit involving about 5,000 homeowners. The suit was settled in 2007 for $38 million.

Naturally, a spot on the BRAC commission’s list spurred community action as local and state officials loudly protested the moving of the base, citing the economic impacts of lost revenue and jobs. They hired a consultant to estimate the gross impact of the base closing at about $700 million to the city. The Oceana base is the city’s largest employer, but it is not the only military site there. And with a non-agricultural labor force of more than 730,800 in the Norfolk/Virginia Beach/Newport News metropolitan area, it is still a small player in a larger, diverse economy.

So what did BRAC do? It decided not to close the base. Instead it ordered Virginia Beach officials to halt and even roll back development around the base through new air noise and building ordinances; offer tax incentives to get businesses to move; and reacquire some 3,400 nearby homes. Local officials estimated cost of these plans at $268 million, although at least one area real estate developer said they would be four times as much. Some 8,000 acres of land around the base, many of which city officials thought would be perfect for homes at one time, will lie undeveloped because of noise regulations.

Politicians opted against exercising public domain rights to seize nearby property, and instead set aside $15 million a year for buy-backs. Almost $60 million later, the state is losing its appetite for these buy backs, and even ended up selling homes it bought back to private developers for as little as 10 percent of what it paid. Despite these costs, all parties in Virginia Beach–the Navy, local politicians, and a majority of voters–are satisfied with the current arrangement.

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In this month’s Economic View column, Thaler argues that smarter military base land policy can help cut the long-term deficit.

When it comes to land use, however, the military is like other areas of government. It doesn’t have incentives to make good decisions about where to put its facilities. It doesn’t have to pay fair market rent for the land it occupies. In fact, it pays no rent or taxes, and, just as bad, has no incentive to move from highly valued land to someplace cheaper.

Indeed, if the military wants to shift more than 1,000 civilian employees from one location to another, it has to receive permission from Congress. And we have had plenty of recent reminders that Congress isn’t a place from which rational choices are likely to emerge.

It is time for a change. Politicians on both sides of the aisle should be able to agree that we face a long-term budget problem. A better land-use policy for the military could make a difference.

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