The house prices were on the rise and many traditional home owners attempted their dreams of becoming a real estate tycoon. Although some buyers might have lived through the recessions in the 70’s, they never experienced it as a consumer and so only seeing housing prices go higher and higher, the idea of owning a home for the long run was embedded as a sure money maker. The last recession was more than 40 years ago and people don’t remember it because all of them were yet to be born or they were just too young. This is the case with all of the players in The Giant Pool of Money.
Jim Finkel, Rachard the marine, Clarence Nathan, Adam Davidson, Ceyla Pazarbasioglu, Mike Francis, Mike Gardner, Glen Pizzolorusso, and Tonko Gast. I can’t blame any of them for falling in to Availability Bias because I too fell for it. Luckily, I bought a house that I could afford, unfortunately many of my neighbors did not. I was born in 1978 and this was my first opportunity of making a large investment for myself. Because I was bit weary, I asked a lot older mentors and family members if I should buy a home and not a single person said no.
All of my friends had houses 2000sq ft or bigger houses for themselves! I couldn’t think of one reason why I shouldn’t buy a house and I’m sure many Americans felt the same and I was amazed how easy the entire process was! Like Richard the marine, I had the ability to lock in a 30 year fixed Veterans Administration loan but my lender opted for the interest only mortgage. Biases due to the irretrievability of instances also came in to play when asking, why throw money away when you can buy?
It’s common knowledge to anyone that buying is always better than renting however, there are instances where renting can be more advantageous. People like Mike Garner that worked at mortgage banks were in a race to make the most deals against other lenders who were doing the exact same thing. Interesting enough, Mike stated that his boss hated the loans that they were dealing but he couldn’t do anything about it because “Other people are offering it”. His boss had been in the business for 25 years and everyone was making money.
Glen Pizzolorusso, a sales manager like Mike Garner was making more money than he knew what to do with it so he did what everyone else did, buy houses! The second bias I’d like to look at is insensitivity to prior probability which is conveyed in the paragraph above. People tend to think of real estate investment as a solid investment like the people that had their piece in the pool of money and everyone involved. People are always going to resort to buying a real estate property versus renting if given the choice. It is perfectly reasonable to predict that house prices will rise in the future.
I don’t think many people will ask themselves “how likely would this house devalue by threefold in next couple of years? ” or much more modest “how likely would house prices fall next couple of years? ” Prior availability of data available suggest that the chances are very slim. It seems like it was a perfect storm brewing with all the right elements that caused this bias. People with money to invest felt it was the right move since federal funds were at record low interest levels and there were significant growth in the housing sector.
The bank workers such as Mike Francis simply satisfied the investors without knowing the outcome and with the initial success, the need of further investigating disappeared. One recommendation I have to prevent availability bias and insensitivity to prior probability, I would say is to carefully examine past history. We all know that last recession was in 1970’s but most people only know as the recession caused by the oil crisis but looking much more in depth, we all know that it was just more than oil crisis that resulted in the recession.
Likewise, people are going to talk about the recession in 2000’s as greedy home owners trying to make money on houses that they couldn’t afford but we know that wasn’t the cause. There is more to the story then the headline and people need to investigate and look at all the possible outcomes. These two biases make it difficult to examine some of the outcomes and it’s everyone’s responsibility to look at all of the possible outcomes even if the chances are very small. We cannot point the finger at just one person in the story of Giant Pool of Money.