A post-autistic approach to the study of real estate investment decision making

Investors are making decisions about buying and selling real estate representing, in total, billions of dollars of transactions in any one year. Given the economic impact of these decisions it is surprising that there isn’t greater understanding of how they are made. The traditional academic explanation for real estate investors’ actions follows a neoclassical economic framework and borrows from the discipline of finance. Finance theory offers portfolio and capital market models to answer the question of how investors should optimise their investment decisions (Brown and Matysiak, 2000). This approach provides elegant mathematical solutions to the optimising question but the models seem poor in explaining the operation of real estate investment markets. What can be done to remedy this situation? This situation is replicate of that in mainstream economics where traditional neoclassical models and econometric modelling provides the dominant academic approach. Frustration with the persistence of this approach, given the low level of empirical support for its explanatory power, has given rise to a movement of dissent amongst economists (Fullbrook, 2003). The dissenters have christened themselves as the post-autistic economics movement, part of a wider move towards critical realism within the discipline of economics (Fleetwood, 1999). What lessons might be learned for the study of real estate investment decision making from this dissenting movement of economists? Well, the post-autistic economics movement rejects a narrow focus on positivism and mathematical modelling and argues for a wider pluralist approach; such a pluralist approach offers the prospect of providing greater understanding of real estate investment markets. Behavioural finance can be viewed as part of a more pluralistic approach, drawing in particular, on findings from the discipline of psychology (Shefrin, 2000; Thaler, 1993). The paper considers whether behavioural finance offers a better understanding of how real estate investment markets work and critically examines the potential dangers of adopting the results of psychological research based on laboratory experimentation (Lipshitz et al, 2001).