The assumption of individuals as ‘homo economicus’—ideal rational beings focused solely on financial gain—often faces criticism. While competent economists do not genuinely subscribe to this notion, similar to physicists not entirely believing in perfect spheres, simplified models offer valuable insight into human behaviour. However, such assumptions are not universally applicable, especially in the context of home buying, where emotions significantly influence decisions.
A notable example within home purchasing is the escalation clause, comparable to eBay’s bidding process. When someone bids on eBay, they can set a maximum offer that automatically increases if other bids arise, saving them from constant monitoring. Similarly, an escalation clause lets a homebuyer indicate they might raise their offer if necessary, for instance, starting at $500k and willing to escalate it to $560k in increments.
However, real estate agents often advise against these clauses, as they may lead to a buyer’s offer being overlooked. When faced with an escalation clause, sellers gain knowledge of the maximum the buyer is willing to pay, which may negatively affect perceptions compared to straightforward offers. For example, if a competing offer of $530k appears, a seller could favour it, believing it reflects a genuine desire rather than feeling lowballed by an escalation approach.
The crucial takeaway is that buyers’ tactics can backfire during negotiations. Selling homes, unlike eBay items, requires perception of goodwill, and many sellers prefer the simpler, transparent approach, even if it costs them extra. The emotional element in this process reflects a broader understanding that nonmonetary aspects play a vital role in decision-making, demonstrating that rational behaviour in economics is often intertwined with human emotions and interpersonal respect.
In conclusion, while the ‘homo economicus’ model provides a framework for understanding behaviour, it fails to capture the complexities of human emotion in transactions such as home buying. Nonmonetary factors often sway decisions, proving that perceived value and respect can outweigh monetary considerations. Readers are encouraged to reflect on how nonmonetary elements have influenced their own decisions in life’s transactions, whether in job choices or significant purchases.
The article critiques the ‘homo economicus’ model, highlighting its limitations in real-life scenarios like home buying, where emotions overshadow pure economic rationality. It explores the concept of an escalation clause in bidding, showing how it can backfire by revealing a buyer’s maximum offer upfront, potentially leading to less favourable outcomes. Ultimately, it underscores the significance of nonmonetary factors in economic decision-making, inviting readers to contemplate their own experiences with such influences.
In summary, home buying exemplifies how the rational decision-maker model falls short of encompassing human emotional dynamics. While financial considerations are key, nonmonetary elements, like the seller’s perception of respect and goodwill, strongly influence outcomes. Such complexities demonstrate the importance of viewing economic behaviour through a broader lens, recognising the emotional factors that drive decision-making processes.
Original Source: www.econlib.org
