The Psychological Nature of Real Estate Cycles
I have been through two previous Real estate cycles here on Kauai. Like this one, they are volatile, complex and persistent. They have pervasive effects on people’s livelihoods, wealth and health. I’ve always been fascinated with the question “What causes real estate cycles?” I read an article by a behavioral economist (Dick Stoken, 1993) that advanced the theory that crowd behavior and mass psychology was the culprit. Mr. Stoken argues that we are not economic individuals who act in our own rational self-interest. Rather, we are psychological beings, conditioned by our experiences, especially those experiences that serve as important lessons of pain and/or pleasure. Because of this, cycles are created: ‘‘Following an extended period of prosperity, men and women adopt the psychology of affluence and its byproduct, economic optimism, wherein they enjoy life, have fun, and become economic risk takers. This mass psychology of optimism, once set off, takes on a life of its own and continues until people become excessively optimistic. They rationalize that what has happened will continue to happen, and thus come to see less risk than actually exists. Consequently, too many people become risk takers, which in turn creates the conditions for a big bust. This bust, or depression, then sets off a psychology of pessimism which continues until people see more risk than really exists. At that point too many people become risk averters, and this lays the foundation for a long period of economic expansion.’ This seems to ring true to me. I’ve noticed that the abstract term “MARKET” actually refers to a general behaviour trend of consumers. As if an orchestra leader is conducting a symphony wherein everyone begins and ends each piece at the same time following ques and signals which the group collectively obeys.
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