Thursday, May 28, 2009

Confirmation Bias

'Confirmation bias' is a term to describe the tendency of the human mind, once a conclusion has been drawn, to emphasize subsequently received information that supports the decision or conclusion and to diminish, distinguish or otherwise minimize the significance of information which contradicts, undermines or otherwise calls it into question.

The current reporting of the trends on residential housing prices offers countless examples of confirmation bias in action. The operative conclusion/decision is the conviction which has prevailed for the last several generations in the United States that house prices always go up, that your home is your best investment, etc. The date coming in recently, to put it mildly, calls that conventional wisdom into question.

All of that data is bad for homeowners, homebuilders, anyone in the real estate business. Some of it is less bad that others. But none of it is exactly positive. However, it is possible to draw some second-order inferences that are non-negative. If the rate of new home construction has falled below the absorption rate for new home inventory and below the rate of household formation, that implies that eventually the situation should turn around. If interest rates are being held at artificially low levels to make mortgages less expensive, that results in an affordability index that would support increased levels of home ownership (if only the sidelined new home owners weren't scared to death of losing their shirts of 'the biggest purchase you'll ever make").

But, even though all the data is bad, the talking heads find someone willing to say something neutral, and the headline writers twist those words into something positive. I really don't think this is the machinations of the National Association of Realtors or the Homebuilders at work. I think it's confirmation bias in action.

Which would suggest that we have a ways to go before it's purged.

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