2. Introduction
• D. Scott Smith, CCIM
Professor of Real Estate, NAR
• Don’t try this at home!
Fair Housing, Steering, Blockbusting
• No magic bullet theory, only less wrong
7. Basic Economic Theory
Key Concept of Basic Economic Theory
• Economic Sectors
Basic + Non Basic Employment
• Economic Base Multiplier
Total Employment / Basic Employment
8. Basic Economic Theory
• Standard Industrial Classification System
• Location Quotient
Total Industry Local / Total Local Employ
_________________________
Nation Industry Total / National Total Employ
9. Basic Economic Theory
• Absorption
The rate at which supply is reduced over a
given time period.
Answers the “how” of demand. Otherwise
known as supply based market analysis
11. Behavioral Economics
Key Concepts of Behavioral Economics
• Decisions not made inside a bubble
• Helps answer the “why”
• All decisions are not wealth maximizing
decisions
15. Behavioral Economics
• Bounded Rationality:
Rationality of individuals is limited by the
information they have, the cognitive
limitations of their minds, and the finite
amount of time they have to make decisions.
16. Behavioral Economics
• Heuristics = Hacks
Experience-based techniques for problem
solving, learning, and discovery that give a solution
which is not guaranteed to be optimal.
• speed up the process of finding a satisfactory
solution via mental shortcuts
• ease the cognitive load of making a decision
• rule of thumb, an educated guess, an intuitive
judgment, stereotyping, or common sense
17. Behavioral Economics
• Diminishing Utility
Example: More happiness with each beer you drink.
After several beers happiness increases but not at
the same rate. Last beer has a lower amount of
happiness gain. If you continue to consume, you
may even cross over into declining happiness, as
you get sick.
19. Behavioral Economics
• Irrational exuberance
Unsustainable investor enthusiasm that drives
asset prices up to levels that aren't supported
by fundamentals
What happens when exuberance occurs?
20. Behavioral Economics
• Herding Behavior
The tendency for individuals to mimic the
actions (rational or irrational) of a larger
group. Individually, however, most people
would not necessarily make the same choice.
• Relative Positioning
How you compare to others
21. Behavioral Economics
• Loss Aversion
the tendency for people to strongly prefer
avoiding losses than acquiring gains. Some
studies suggest that losses are as much as
twice as psychologically powerful as gains
• losses loom larger than corresponding gains
22. Behavioral Economics
• Example of Loss Aversion
• Lets say a deal is going to increase your income by
$200. But in order to gain that surplus you have to
also go through a loss. So you gain $1,200 from the
deal and then you lose $1,000. You are still up $200
but many won’t want to take that deal because they
don’t like the feeling they are left with of losing the
$1000. And the same thing happens when you
introduce probabilities into the equations.
23. Example of Loss Aversion
• If you are 90% possible you are going to gain
$1,000 and 10% possible you are going to gain
$0, the mathematical gain calculate would be
$900. Now let’s say you had a comparable
deal in which you were only going to gain
$800, but it is 100% possible. More people will
choose the $800 over the $900 because of
loss aversion and risk heuristics.
25. Ultimatum Results
• Why didn’t you offer a lower % ?
• Define “Fair”
• Did you maximize your wealth options?
Conventional economics predicts and insists that
responder will accept any offer because any above
zero increases responders income. And proposer will
offer 1%. Behavioral Economics suggest a deal that
both can gain from and avoid 100% loss.
30. Hassel Free
• Easy access to property
Think poorly designed parking lots
• Easy transaction
• Think like Apple
• Easy negotiation
• Connecting all the dots
31. Emotion
• Psychology of decision
• Neuromarketing
• Feel good measures
• Social norms
• Framing
38. Demographics
• Study of characteristics in an
identified market
• Hard facts and external
realities
• Age, Sex, Income, Race, etc.
• www.websitehere.com
40. Indicators
• Used as a forecast for local and national
economies
• Demonstrate when an economy expands and
contracts
• Different indicators will be looked at for
different asset or investment types
42. Psychographs
• Sensory component
• Categorization about how you feel about
something. VAL System
• The key to understanding what motivates a
customer
50. Achievers
•Motivated by achievement and work-oriented
•satisfaction from jobs and families
•Politically conservative
•Respect authority and status quo
•Favor established products and services that
show off their success to their peers.
51. Strivers
•Low-resource group,
•Motivated by achievements
•Values very similar to achievers
•Have fewer economic and social, and
resources.
•Style is extremely important
•Strive to emulate people they admire
52. Experiencers
•Median age of 25.
•Energy, physical exercise, social activities
•Avid consumers, spending on clothing, fast-
foods, music, etc.
•Emphasis on new
products and services
53. Makers
•Practical people who
value self-sufficiency.
•Focused on the familiar-family, work, and
physical recreation
•Have little interest in the broader world.
•Appreciate practical and functional products