Behavioral Research in Real Estate - American Real Estate Society ...

Behavioral Research in Real Estate: A Search for the Boundaries Roy T. Black,* M. Gordon Brown,** Julian Diaz III,*** Karen M. Gibler**** and Terry V. Grissom***** Executive Summary. This article examines the growing body of behavioral literature in real estate. The emerging view of real property experts as problem solvers bounded by cognitive limitations is reviewed. Normative versus descriptive processes are presented as are potentially biasing heuristics and the role of feedback. In separate sections, the authors explore avenues of potential real estate research and methodologies in finance and traditional economics, expert decision making, marketing and markets, spatial analytics, organizational behavior and development, and the legal and regulatory environment.

Introduction Academic and professional real property research in the United States has finance as its primary focus, and the real estate asset is most often treated as a financial asset. There are several reasons for this concentration, including the alliance of U.S. real estate programs with finance following criticism of academic real estate programs by the Ford and Carnegie reports in the 1950s. While the link to finance has proved to be a beneficial one that has produced much quality research, it has also resulted in the setting of artificial boundaries on real estate research. Real estate programs patterned after the Built Environment programs in the United Kingdom have not been as severely restricted, but have a broader focus, being located often outside business schools. The authors take a broader look at real property assets and propose the lowering of disciplinary boundaries. If every real property problem is seen as a finance problem, researchers miss the opportunity to use tools and thoughts from other disciplines. As the old saying goes, ‘‘If the only tool you have is a hammer, then every problem is a nail.’’ There is a rich body of knowledge in other disciplines, and the authors suggest the real estate asset as the center of a domain that borrows from other disciplines to further understanding. Diaz (1993) argues that real estate does not need paradigms to define its body of knowledge and its research effort. While paradigms help to focus research, they can also limit it. Real property is logically the focus of research and interest because of its immense importance in human affairs. Within business schools, management and marketing are also disciplines with which real property programs could be aligned. Architecture and engineering are disciplines *Georgia State University, GA 30302-4020 or [email protected]. **Space Analytics, Denver, CO 80206-2505 or [email protected]. ***Georgia State University, GA 30302-4020 or [email protected]. ****Georgia State University, GA 30302-4020 or [email protected]. *****Georgia State University, GA 30302-4020 or [email protected].

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representing the physical realm of real property, but of course are taught separately due to distinct bodies of knowledge and professional licensing requirements. Law clearly deals with many subjects, but has a well defined area of research, cases, statutes and regulations dealing with real property. Planning covers the public policy and administration aspects of land use, but is also outside real property programs. In the U.S. it is usually aligned with architecture. Exhibit 1 shows a theoretical (and undoubtedly incomplete) representation of the domain of real property and its overlap with other disciplines. One uniting factor of all these disciplines (finance included) is that they ultimately derive their existence from human behavior. Cash flows are created by the actions of human beings making decisions to consume space over time. Financial assets must be subjected to the management process to achieve the desired goals of owners, renters and other consumers of the space. Owners must engage in marketing research about human activities to make the real property assets productive. Society must place boundaries on human behavior with respect to land and set up rules and procedures to resolve land disputes. Architects cannot design effective and profitable space without knowing how human beings will interact with their built environment. To build on the previous reference to finance, finance research in real estate will be richer

Exhibit 1

Economics Finance

Management Marketing Planning

Real Property

Engineering

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Architecture

Law

Behavioral Research in Real Estate

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if researchers go behind the cash flows to see how and why they are created through the real property medium. Exhibit 2 depicts the thought process. This article consists of six sections, reflecting the views of the authors on the behavioral aspects of real estate. The first section entitled Behavioral Research into Real Estate Expert Decision Making by Julian Diaz III chronicles the progress of what has been to date the most traveled path of behavioral research in real estate: expert behavior. The next section by Karen M. Gibler, entitled Consumer Behavior Decision Making Theory and Models explores the links between consumer behavior, traditionally a marketing field, and real property. The section entitled Traditional Economic, Finance and Real Estate Decision Models by Terry V. Grissom looks into the past of classical economics to make the case that much of economics is behavioral in nature, and theories and practices can be directly applied to research on the real property asset. The next section entitled Real Estate as a Cognitive Tool: Networks of Space and Communication Behavior by M. Gordon Brown links corporate real estate with spatial analytics. The section entitled Corporate Real Estate and Organizational Behavior by Roy T. Black looks into the links between organizational behavior, a management discipline, and corporate real estate. The following section entitled Law and Real Estate also by Roy T. Black shows that while real estate law is an obvious distinct body of knowledge, real property researchers should not abandon the field to attorneys and legal scholars. The authors hope that the points made in each section will help to break down disciplinary barriers and encourage property researchers to go outside traditional avenues of research for fresh areas of inquiry that will enrich the property discipline and build on tools and theories used by researchers in other functional areas.

Behavioral Research into Real Estate Expert Decision Making Behavioral research into the decision-making processes of real estate experts springs from the process of tracing the tradition of research into human information processing. The theoretical groundwork for the tradition was laid in Newell and Simon (1972) whose theory of human problem solving views the human mind as an information processor of limited capacities. Human problem solving is a function of these limitations. The earliest application of this approach in property research is found in the dissertation of Diaz (1987) that studied residential valuers in the U.S. and concluded that their problem solving departs from the methods that they are taught.

Exhibit 2

HUMAN BEINGS

BUILDINGS

CASH FLOW

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Research Methods Used

Behavioral research into the decision-making processes of property experts has used sophisticated methods to develop primary data. Generated data are analyzed with straightforward evaluative techniques such as nonparametric (distribution free) statistics and analysis of variance. Three data development techniques, the field survey, the process tracing protocol and the controlled experiment dominate real property behavioral research. The field survey is apt for revealing attitudes and opinions and frequently yields results that serve as guiding hypotheses for more structured followup research. A variation on the field survey, the intensive interview, has also been used effectively. Process tracing protocols capture actual human decision-making processes and when not relying on introspection, overcome field survey limitations. In a typical study, subjects are asked to solve a problem (e.g., provide an appraisal judgment or a loan underwriting decision) by requesting relevant information as needed. By carefully recording the sequence of requested and utilized information, a subject’s problem-solving process can be traced. Controlled experiments are powerful tools for collecting evidence of causality (internal validity) because they offer the researcher the opportunity to isolate the impact of key explanatory variables and control for the impact of exogenous influences. The greatest weakness of the approach is the generalizability of results across settings, people and time. In the early stages of a research program, these concerns over external validity are greatly outweighed by the need to propose causal relationships that can be tested and further examined. The controlled experiment has therefore been the most popular tool among behaviorists studying property experts.

The Literature Almost all behavioral investigation into the problem solving of property experts has been focused on valuers. This research can be broken down into four categories, departures from normative models, comparable sale selection, valuation biases and feedback. Study into normative versus descriptive processes was initiated in Diaz (1990a). Here the actual valuation processes of expert residential valuers were found to differ significantly from normative models. Whereas the normative appraisal process is fundamentally deductive beginning at the widest possible focus, the appraisers of this experiment used a more efficient, inductive process that began with the subject property. Adair, Berry and McGreal (1996) concluded that residential valuers in their investigation viewed critical property characteristics differently than did actual market participants. This calls into question both the appropriateness of normative valuation methodologies and positive models of value formation. The comparable sale selection processes used by experts were described and contrasted with novice selection processes in Diaz (1990b). Expert residential appraisers used screening strategies not employed by novices. Experts also tended to consider less data as compared to novices suggesting the potential for sub-optimal and even biased results. The potential for biased results in comparable sales selection VOLUME 6, NUMBER 1, 2003


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was further studied in Wolverton (1996) and in Gallimore and Wolverton (1997). These studies produced evidence that knowledge of subject property transaction prices could bias comparable sales selection as well as final value judgments. Both U.S. appraisers and U.K. valuers were found to be susceptible to these biases but to differing degrees, presumably due to differences in valuation culture. Inspired by Tversky and Kahneman’s (1974) work in heuristic problem solving, investigation into bias in valuation judgment is an important theme within the body of behavioral property research. Gallimore (1994) found that valuers may inappropriately give greatest weight to the most recently considered information. Evidence of a confirmation bias was uncovered in Gallimore (1996) where expert valuers indicated that they make early, preliminary value judgments and then seek evidence in support of these early opinions. Havard (1999) found an upward bias among student valuers who were more likely to adjust a low valuation upward than a high valuation downward. Diaz and Hansz (1997) found that experts operating in geographically unfamiliar markets were influenced by anonymous expert opinions, but Diaz (1997) discovered no evidence that expert valuers operating in markets familiar to them were so influenced. Once again working with expert appraisers in unfamiliar markets, Diaz and Hansz (2000) uncovered other significant reference point anchors including unclosed contract prices on subject and comparable properties. The tendency of appraisers to use their own previous value judgments as anchoring reference points was uncovered in Diaz and Wolverton (1998). Seeking a behavioral connection to the appraisal smoothing hypothesis, this study demonstrated that valuers insufficiently update their previous value judgments, that they anchor to their previous valuations and that they tend to make adjustments to these previous valuations, which are insufficient in light of the available market evidence. Feedback is a valuation topic currently attracting great attention from behavioral researchers. Many of these studies deal with client feedback and pressure. Kinnard, Lenk and Worzala (1997) surveyed U.S. appraisers and found some evidence that appraisers may be willing to change valuation conclusions in response to client pressure. Wolverton and Gallimore (1999), also employing a survey, concluded that the perceived valuation goal of U.S. appraisers is strongly related to the degree and nature of client feedback. The authors were not able to replicate this result in a survey of U.K. valuers (Gallimore and Wolverton, 2000). In a series of intense interviews of New Zealand valuers, Levy and Schuck (1999) supported the belief that valuers adjusted their value opinions or reported value estimates in the face of client influence. Further, the authors concluded that the magnitude and direction of the client-induced bias are influenced by a wide range of valuer as well as client characteristics. Market feedback as a source of potential valuation bias was the focus of the controlled experiments conducted in Hansz (1999). Participating expert appraisers when presented evidence that their valuation judgments on a previous assignment were too low demonstrated an inappropriate tendency to adjust upward their valuation judgment of a totally unrelated property. However, an inappropriate downward adjustment was not solicited from these same subjects when they were presented evidence that their previous judgment had been too high.

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Other than in the area of valuation, important real estate behavioral research into expert problem solving has been conducted in banking and negotiation. Hardin (1997) employed process tracing techniques to loan officers and found that a lender’s perception of the attractiveness of a potential loan was a function of the lender’s training and experience. When considering the same loans, lenders with business lending experience and training consistently made recommendations opposite to those made by lenders with property lending experience and training. The anchoring role that asking price plays in property negotiation was explored in a series of controlled negotiating experiments detailed in Black and Diaz (1996), Black (1997) and Diaz, Zhao and Black (1999). Property professionals as well as real property students gave inappropriate weight to asking price in these experiments. This tendency held even when the asking price was incongruous with available market data and when a reward system contingent on negotiating performance was in place. Even with penalties for poor negotiating outcomes, student subjects in these controlled experiments negotiated poor settlements by devaluing cognitively demanding market data in favor of incongruous asking prices. Aycock (1999) designed a set of experiments to test the relative strengths of asking price versus initial purchase price as anchors in negotiated settlements. Among the property professionals serving as subjects, Aycock found no evidence that initial purchase price exerts a greater influence on settlement prices than relatively low asking prices but did find evidence that relatively high asking prices had a greater influence on settlement prices than did initial purchase price. There was also no support for the contention that buyer knowledge of initial purchase price had significant influence on final settlement prices either in low or high asking price environments. Future Directions

While a significant body of research focused on the behavior of valuation experts has emerged, the behavior of other types of property experts is still unexplored. Early study of bankers has been fruitful and merits further effort. A solid research paradigm has been established and can easily be applied to other classes of experts as well.

Consumer Behavior Decision-Making Theory and Models Introduction

Consumer or buyer behavior is the study of individuals, groups or organizations selecting, purchasing, using and disposing of products and services to satisfy needs. Consumer behavior research explores the decision-making process that precedes purchase, the purchase action and post-purchase activities and evaluation. The intent is to determine not only what people buy, but also why they buy it and the processes involved in their decision and action. Consumer behavior can be viewed as a problemsolving activity in that individuals and businesses have needs and they must decide how best to satisfy those needs. VOLUME 6, NUMBER 1, 2003


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Origins of Consumer Behavior Theory

The original basis of consumer behavioral theories comes from demand analysis in microeconomics with its explanations in terms of diminishing marginal utility and indifference curves. Such analysis does help explain how people will act in the marketplace in terms of product choices under ideal conditions and demonstrates the importance of income and prices in determining purchasing levels. It does not, however, explain why people act the way they do within these general confines. In an attempt to better explain actual human behavior, marketers such as Katona (1953) modified traditional economic theory to include psychological, sociological and anthropological factors to better understand consumer problem solving. Among the cognitive psychology concepts incorporated into consumer behavior theory are motivation, learning, perception, attitudes and self-concept. Psychological theories such as Maslow’s (1943) hierarchy of needs help marketers to understand the drivers that motivate consumers to purchase goods. Theories about memory organization, such as the associate network, help researchers understand how people store information and develop knowledge (Anderson, 1983). Classical conditioning, operant conditioning and cognitive learning theories help explain how experience leads to changes in knowledge, attitudes and behavior (Engel, Blackwell and Miniard, 1995). Psychology has also been helpful in understanding the communication process as well as symbolic meanings and their influence on consumer perception and attitudes. Insights about perception, how people recognize, select, organize and interpret stimuli to make sense of the world, has helped make sense of perceptual bias, which allows a person to select relevant data from a massive flow of information (Solomon, 1996). Sociological theories are used to explain human behavior in groups and social settings. Some sociological concepts that have enriched consumer behavior theories are social stratification and the influence of reference groups. Social stratification represents the hierarchical division of members of a society into relative levels of prestige, status and power (Rossides, 1990). Social classification systems (Warner, Meeker and Ells, 1960; Lipset, 1963; and Parsons, 1964) have helped to identify how social class affects values, attitudes, self-perception, activities and use of information sources in the consumer behavior process. Other theoretical contributions include structural functionalism, which assists in understanding how individuals internalize cultural norms and are guided by those norms in making their decisions. Conflict theory explores how individuals behave when differences of opinions exist and a decision must be reached. Exchange theories attempt to explain negotiations between buyers and sellers within society (O’Shaughnessy, 1992). The study of psychographics has also come from sociology. Psychographics is an operational technique to measure lifestyles, patterns in which people live. Cultural anthropology has contributed to understanding of consumer behavior by identifying what constitutes a society’s culture, its folklore, values, expected roles and taboos (Walters, 1974). Consumer Decision-Making Models

By the late 1960s, three major comprehensive models of consumer decision making (Nicosa 1966; Engel, Kollat and Blackwell, 1968; and Howard and Sheth, 1969) had

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been developed that traced the psychological state of individual purchasers from the point at which they become aware of the possibility of satisfying a need with a product or service to their final evaluation of the consequences of making a purchase. The assumption is that purchase behavior is preceded by a sequence of mental information processing. The Engel, Kollat and Blackwell comprehensive model, which focuses on the decision process in an extensive problem-solving situation, has been modified over the years. This model incorporates external or environmental influences, internal characteristics of the consumer, communication between the two, information processing, motive-directed cognition, the purchase act and the post-purchase evaluation of the experience. The important environmental influences in this model include culture, social class and reference groups such as family. The individual differences among consumers that affect behavior may be categorized as resources, knowledge, attitudes, motivation, personality, values and lifestyle. Ensuing research has focused on each of the elements of the model. Consumer Behavior Research

A growing portion of consumer behavioral research deals with the decision-making process itself. Motivational research in consumer behavior has examined the process of need activation when discrepancy between actual and desired states arouses a drive for a consumer to take action in an attempt to reach a goal (Engel, Blackwell and Miniard, 1995). Once a need is recognized, consumers must search for information about how to satisfy the need. Research in consumer information search has explored relationships between information search methods and internal consumer characteristics such as age, education, experience and knowledge, and external variables such as situation (Bettman, 1979; Kiel and Layton, 1981; Beatty and Smith, 1987; Bettman and Sujan, 1987; and Punj, 1987). The methods consumers use to delineate then compare alternatives have also received considerable attention in consumer research. The process of narrowing choices to an evoked set and the identification of salient determinant attributes to make comparisons has been examined (Alpert, 1971). Decision rules have been classified as noncompensatory (conjunctive lexicographic) and compensatory, depending on whether negative attributes of an alternative are offset against positive attributes in an overall evaluation. The study of consumers’ evaluation of products after purchase has focused on expectancy disconfirmation theory, which postulates that satisfaction or dissatisfaction is the outcome of a comparison of pre-purchase expectations against actual outcomes (Oliver, 1980). To better understand consumer knowledge and attitudes about product alternatives, consumer behavior researchers have attempted to follow the memory storage process at it relates to products and the market. One of the most widely accepted frameworks of the relationship between attitudes and consumer actions is the Extended Fishbein model, also known as the Theory of Reasoned Action that states that behavior is best predicted by intention (Ajzen and Fishbein, 1980). Intention is a function of a person’s attitude toward a behavior contingent on subjective norms that influence behavior. Attitudes are developed from beliefs about the favorableness of a behavior and the strength of those beliefs. A central motive researchers have found among consumers VOLUME 6, NUMBER 1, 2003


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is to enhance one’s self-concept (Engel, Blackwell and Miniard, 1995). Research has shown consumers purchase products that are consistent with the actual self or that are expected to help achieve the ideal (Sirgy, 1980, 1982). Considerable attention has also been given to lifestyle and its relationship to the demand for various types of products and services. Wells and Tigert (1971) developed a well-known questionnaire to measure activities, interests and opinions (AIO) as a method of classifying consumers by lifestyles that reflect different patterns of consumer consumption. Information processing has also attracted a great deal of consumer research. Advertising research has dealt extensively with threshold levels for perception (Dember, 1961) and how to get someone’s attention. Marketers have also been concerned with the consumer’s interpretation of stimuli, and how it will be categorized and stored in long-term memory. Researchers have determined that consumers use perceptual filtering whereby they only pay attention to stimuli deemed relevant to existing needs, wants, beliefs and attitudes, and disregard the rest (Janiszewski, 1993). Consumers also subconsciously attempt to maintain cognitive consistency by perceiving stimuli so that they do not conflict with basic attitudes, personality, motives or aspirations. Reference groups have been identified as a point of comparison for consumers regarding attitudes, beliefs, values and behavior. Researchers have determined that the level of influence a particular reference group has on a consumer depends on cultural pressures, fear of deviance, commitment to the group and group unanimity, size and expertise (Solomon, 1996). Applications to Real Estate

Leasing and purchasing real estate and related financing requires extensive problem solving by consumers who trade infrequently in the market for an expensive and highly visible durable good. Consumer behavior models can be used to understand (1) the influence of internal and external factors on individual and business consumers’ decisions and (2) the process consumers use to make a decision regarding real estate purchase, financing, operation and sale. While some researchers have used consumer behavior theories in real estate research (see Gibler and Nelson, 2003, for examples), especially in the area of home search and selection, much remains unexplored. In the area of environmental or external influences of consumer behavior, the role cultural change is playing in the demand for types of real estate throughout the world offers great challenge. For example, multigenerational households are giving way to independent elderly housing in many nations. The impact of changes in social class systems also needs examination as education and earning power allow greater social mobility than ever before. Changing family structure and social patterns are having an effect on decision-making roles and reference groups that influence consumer behavior.

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Research is also needed concerning individual differences and how they influence real estate decision-making. Research has been conducted on information search in buying houses, but technological changes have resulted in new methods of communicating information that may entirely change previous patterns. Motivational research opportunities in real estate abound to assist in understanding why people value certain properties for reasons other than physical features. Marketers have long understood that it is the perception, not the reality that is the relevant measure of a product from the consumer’s point of view. Understanding the roles of lifestyle and self-concept in determining consumers’ preferences will help in establishing the true market value of properties and their features. Research into transactions themselves is needed to understand the real estate exchange process, with better understanding of negotiations and conflict resolution. A practically unexplored area of research is the influence of the purchasing situation on real estate choices. Thus, research incorporating consumer behavior theories can help us better understand why individuals and organizations prefer certain properties, how they assign values to properties, the process they use to make property decisions and important influences on their decision making. This knowledge will contribute to more accurate valuations, more efficient transactions and more satisfied consumers.

Traditional Economic, Finance and Real Estate Decision Models Introduction

To understand the potential for behavioral research in real estate decision-making, it is necessary to identify the complexity of real estate as an academic area of inquiry and its roots in economic and financial studies. A general organizational grouping of academic real estate, especially on a global basis indicates that real estate is housed in free standing real estate departments, finance departments, economics and geography departments, schools and/or departments of built environment, architecture, surveying, city and urban planning and construction (among others). This broad array of academic disciplines concerned with decisions related to real estateoriented problems indicates a broad perspective of problem solving needs that the traditional economic choice models used in economics and finance do not address.1 Despite these broad needs, Andrews (1977) and Grissom and Liu (1994) illustrate the dominance of the economic perspective of the academy in the analysis of real estate. Andrews uses a broad definition of economics given his institutional perspective, while Grissom and Liu link the institutional framework of land economics to the positivist approach of neo-classical economics. The latter framework is used in most economic and finance departments and in areas of real estate studies. It is an approach consistent with the membership of the American Real Estate Society (ARES) and the American Real Estate and Urban Economics Association (AREUEA). The relevance of this delineation of real estate studies within a sphere of economic science is that it enables the focus of decision-making and behavioral concerns towards the assumptions of the choice paradigms used in the majority of real estate, finance and economic research involving land and spatial resources. Whether these VOLUME 6, NUMBER 1, 2003


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rational choice paradigms and behavior assumptions are appropriate for many of the problem situations actually experienced in real estate and related financing situations presents many opportunities to investigate alternative research techniques and options of inquiry to the deductive positivist logic approach of neo-classic economics. Traditionally, economics and finance have followed a positivist logic approach to problem analysis (see Blaug, 1996). This preference has focused the modeling and selection of decision parameters as per Kuhn (1962) towards a system of behavioral assumptions and decision constraints, preferences and definitions of specific market organization characteristics. These characteristics suggest limited control or influence by individual decision makers and place an emphasis on perfectly competitive market behavior, based on price taking and rational selection based on constrained options as defined by exogenous forces. Endogenous behavioral patterns are limited or even assumed away other than the rationale of the optimization/maximization of some measure of benefits (or minimization of some measure of costs or loss). Alternative Behavior Perspectives in Economics and Finance

Behavioral alternatives to the traditional economic assumptions (as defined in the disciplines) have arisen in the study of general economics, finance and real estate. The more radical changes have occurred in the domain termed experimental economics (behavioral) in which the choice responses of economic agents to material decisions have been tested for humans and even rats in the constraints of laboratory observation as employed in the biological and physical sciences. See Battaglio, Kagel and Reynolds (1981) tests on rats’ behavioral trade-off of pain and material rewards. Research contributions in this arena of inquiry have been advancement in the theories of behavior and choice as directly measured with experimental design. The design has been to apply laboratory observational tests and techniques to economic choices and design rules of individuals and organizations. Other research in this context are Battaglio, Kagel and Reynolds (1977) and Van Huyck, Cook and Battaglio (1994). Traditional Economics

More traditional attacks on the assumptions of economic behavior are presented in the works of Greenhut (1974, 1981, 1982), Norman (1983, 1986), Greenhut, Norman and Hung (1987), Fujita (1988), Krugman (1993a, 1993b), Venables (1996) and Fujita, Krugman and Venables (1999) as they challenge the assumptions of perfect competition with the development of imperfectly competitive models incorporating a spatial approach. The behavior contributions of merit are the identification of choices due to the heterogeneity of space and the implications of conjectural responses based on the interdependence of economic decisions and conjecture of behavioral responses to specific actions. Conjectural responses entail the recognition of game theory and decision-theoretic approaches to economic actions of a specific decision/decisionmaker on these competitors and associations and their action/reaction to the initiators and one another. This increases the complexity of economic-based decisions and thus requires an expansion of the traditional choice modeling of economics and finance.

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Behavioral Finance

Behavioral finance has been much more limited in its divergence of choice and decision models than general economic analysis. This in part may be due to its narrow scope. Though this narrow scope has enabled finance to ascend to a disciplinary status in a relatively short time, its crux is effectively focused on temporal economic choice, the time value of money, temporal indifference choice and utility analysis. These traditional economic analytics are applied to assorted contractual patterns of revenue flows and the associated risk exposures that of essence occurs because of temporal implications as identified by Martin, Cox and MacMinn (1988), Copeland and Weston (1988) and Allen (1983). The focus of behavioral finance inquiry has addressed anomalies as variations that have occurred in the formulation and testing of the traditional paradigms and behavioral assumptions of the discipline of financial economic decisions. One division of behavioral finance has continued with Keynes’ (1892) concern with the fallibility of human decision-making that has been extended to both the logical and psychological theories of stock prices. The literature in the 1990s such as represented by the works of DeBondt and Thaler (1985, 1995), Lo and MacKinlay (1988, 1990), O’Shaughnessy (1996) and Lo (1997) that have addressed behavioral characteristics of over-confidence, over-reaction, attractions to fashions and fads and even hubris that can lead to predictable patterns of stock-price movements and can be used by investors to implement successful strategies. This line of work attacks efficient market theory, with the prospect that the market may be predictable. Other researchers such as Lakonishok, Shleifer and Vishny (1994) suggest that levels of risks for ‘‘value’’ stocks can be attributed to behavioral issues such as systematic earning surprises and behavioral expectations of growth. They attribute these risk measures (variations from expectations) to overconfidence of investors rather than Fama and French’s (1988) attribution that these types of securities are inherently more risky than selected benchmark return measures. Another conflict of the behavioral and traditional financial approaches has arisen with the one-third loss in value to market prices that occurred in the October 1987 market crash. Behavioralists argue that such a rapid price adjustment cannot be attributed to changes defined to impact rationally determined prices and must be linked to psychological rationale. DeBondt (1995) extends his financial perspective to real estate market structure and investor responses. A more fundamental example of behavioral finance concerns as opposed to the anecdotal issues of anomalies in the theoretical foundations is the development of principal-agency theory and the impact of agency effects on the process of finance decisions (see Jensen and Meckling, 1976). Agency theory evolved because the general assumption of the maximization of firm value breaks down as a result of the diverse goals and objectives of personnel involved in a single enterprise, often because of a separation of ownership and control.2 The findings of behavioral finance as limited by the constrained definition of financial economics to the money-time dimension of real estate can only assist inquiry into VOLUME 6, NUMBER 1, 2003


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one set of real estate decision tools. Broader issues of concern to real estate as a discipline must consider a more general and inclusive concept of economics. Alternative Behavior Perspectives in Real Estate

Investigation of behavioral analysis in real estate can be separated into a contemporary or empirical branch and a more traditional land economic branch. The contemporary empirical branch of behavior research in real estate has paralleled the advancements made in experimental economics. Major advancements in the behavioral analysis of real estate decision-makers at varying levels of expertise have been conducted by Black, Diaz, Gallimore, Hanz, Hardin and Wolverton. However, the theoretical development and broad philosophical contributions of this research branch is often lost in the academy’s focus on the advancements in experimental design and empirical research procedure that these works have offered. Inquiry into the advancements of behavioral research in real estate and experimental economics relative to the more limited research observed in finance enabled an alternative perspective towards the development of discipline than that offered by Kuhn (1962). Real estate and general economics offer a greater breadth of analytical options than the narrow positive logic approach promulgated in finance. The foundation of this intellectual breadth is identified in the taxonomy and criticisms offered in the works of Keynes (1892) (see Chryst and Back, 1966). Keynes separates economic inquiry into two general branches of analysis: positive economics (from the English classical and neo-classical traditions) and normative economics (the German historical tradition based on Hegel’s philosophical foundations and the empiricism of Bacon). Investigation into the two branches offers significant insights into the current line of behavioral investigation. The first is that when the differences between the two approaches are systematically analyzed, the key variation after the research approaches are isolated is the assumptions of behavior and decision criteria. A second implication of understanding the normative-institutional approach is that it is the conceptual basis for land economics as a discipline. This is significant as noted above, because land economics is the basis for a major approach to the study of academic real estate. Land economics is receptive to this orientation because the occurrence of the effects of resource and spatial decisions are often external to the control of individual decision makers and not negotiated through the market mechanism (at least directly). This reality due to the attributes of the asset/resource was influenced by the academic origins of its study. In brief, Richard T. Ely identified as the founder of land economics (at least in the U.S.) as well as a key influence on the founding of the American Economics Association was trained in Germany in economics and law and recognized the extent of institutions and sociological behavior on economic decisions relative to externalities.3 His placement and tenure at the University of Wisconsin significantly influenced the analytical foundation, organizational structure and research over the long run creating a concentration of institutional economists at that institution including Commons, Witte, Edie and Ratcliff (see Ratcliff, 1976; and Nelson, 1997).

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This concentration of institutional thought greatly influenced the land economics work of Andrews, Babcock, Ratcliff and Graaskamp over the years. This influence of institutional thought resulted in the incorporation of behavioral assumptions or perceptions that vary from the positive assumptions of behavior in general economics and finance and offer fertile ground for future behavioral investigation. Summary and Link to Contemporary Behavioral Models

Traditional economic analysis and its rational choice paradigms can incorporate the broader behavioral dimensions of institutional economics. The concerns of economic sociology/institutional economics with the theoretical constructs of behavior are related to the theoretical underpinnings of the Black and Diaz (1996), Black (1997) and Diaz, Zhao and Black (1999) experimental real estate economic designs. Since the foundations of both economic analysis and behavioral inquiry are to understand and explain choice and underlying behavior as they may assist the forecasting of future decisions, then extensions and improvements in overall theoretical development is a key objective of the discipline. The integrative approach is suggested at this point, as an alternative to the limited constructs of traditional economic theory. It may only offer an intermediary step in the behavioral agenda, however, because the possible development of new theory must be the focus of academic inquiry. As per the lesson learned from the rejection of institutional thought from its peak in 1930s to 1950s, it is inadequate to simply employ destructive exposure of assumptions or the collection of new facts to beat an old theory. New alternatives, whether as hybrids of the old or distinct new theoretical constructs, must be developed to enable disciplinary advancement.

Real Estate as a Cognitive Tool: Networks of Space and Communication Behavior Introduction

Considered as networks of space and cognitive behavior, work organizations yield second-order behavioral phenomena. (The behavior of individuals would be called first-order phenomena.) By considering both the work organization and the space it occupies as networks, each mapped onto each other, real estate can be conceptualized and analyzed as a cognitive tool of the organization. Real Estate, Uncertainty and the Changing Work Organization

The last decade saw a dramatic restructuring of the office space market in the major industrial economies reflecting what Peters (1989) predicted ten years ago: that ‘‘tomorrow’s companies’’ would need to address ‘‘unprecedented uncertainty’’ requiring speed to adapt to fragmented and customized markets. As what was known as ‘‘office work’’ was performed decreasingly in office buildings and increasingly in spaces and places traditionally designated for other uses and activities—residential, industrial, retail—the rapidly changing space needs of work organizations dramatically altered the demand for real estate products. VOLUME 6, NUMBER 1, 2003


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Although research on the workplace over the past several decades is voluminous, determining how it has relevance to the larger problems of real estate has been challenging. Most of this research has focused on the individual and group levels of the organization. Stokols (1985) states that ‘‘. . . the applied value of the existing research literature as a basis for enhancing the design and management of work environments remains limited in several respects.’’ One reason is that there have been no taxonomic schemes developed that can apply to the wide range of work environments that are sampled and studied. Communication: Content, Uncertainty, Efficiency

Human cognition is no more independent of space than it is of language and just as language is a cognitive tool, so are space and the spatial patterns manipulated largely through design and real estate decisions (see Exhibit 3). A few key findings from communication and human information processing research in organizations demonstrate this logic. The capacity of an organization to maintain a complex, highly interdependent pattern of activity is limited in part by its capacity to handle the communication required for its coordination (March and Simon, 1958). Organizations increase communication capacity by making communication content (information) more efficient. ‘‘A . . . method for increasing the organization’s tolerance for interdependence is to increase

Exhibit 3 Spatial Integration and Segregation A

B A

B

C C

D

Symmetry RA = 0.0 A > D, B > D, C > D A=B=C

D

Asymmetry RA = 1.0 A>B>C>D

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the efficiency of communication by making it possible to communicate relatively large amounts of information with relatively few symbols,’’ (March and Simon, 1958). Blueprints, accounting terminology and computing technology are examples of packing lots of information into small elements. Another, socially pervasive mode of efficient communication is jargon. Every technical group, professional group and organization develops its own jargon, a special shared vocabulary that allows those who use it to classify the world through its terminology and evoke proper responses to the world. While jargon is criticized by outsiders for its lack of generality, it is this very specificity that makes it possible for ‘insiders’ to grasp what is important and to communicate it quickly and unambiguously among themselves. But jargon and other shorthand or coded terms of information are limited to phenomena that are more routinely experienced and shared. ‘‘Language is also very effective in communicating about things that can be classified and named, even if they are intangible. . . On the other hand, it is extremely difficult to communicate about intangible objects and nonstandardized objects. Hence the heaviest burdens are placed on the communications system by the less structured aspects of the organization’s tasks, particularly by activity directed toward the explanation of problems that are not yet well defined,’’ (March and Simon, 1958). The less structured the organizational problem or task, the less definite the communication content. A content void inevitably develops from such uncertainty, which will tend to be filled by existing concepts, schemes or jargon. ‘‘Hence the world tends to be perceived by the organization members in terms of the particular concepts that are reflected in the organization’s vocabulary. . . [which] become, for members of the organization, attributes of the world rather than mere conventions,’’ (March and Simon, 1958). Thus, a subtle change takes place in the everyday life of an organization as its members employ a content of communication that may not reflect the real or objective uncertainty or complexity of the problems actually faced. Instead of content formed by reality; reality (in the mind of the organization member) is formed by content. In such cases the content, which could be in the form of jargon, absorbs, rather than reflects, reality. [This] reification of the organization’s conceptual scheme is particularly noticeable in uncertainty absorption [which] takes place when inferences are drawn from a body of evidence, and the inferences, instead of the evidence itself, are then communicated (March and Simon, 1958). The deleterious effect of jargon is that it can mask uncertainty absorption. When inferences are drawn from a body of evidence, and the inferences, instead of the evidence itself, are then communicated, the phenomenon of uncertainty absorption has taken place and this severely limits the ability the recipient of a communication to judge its correctness (March and Simon, 1958). VOLUME 6, NUMBER 1, 2003


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Location, Location, Location: Mapping the Networks

Formal organizational structure sets up one source of communication networks by differentiating them from one another and integrating them into a hierarchy or other forms of order. Rogers and Kincaid (1981) identify ‘‘two main classes of determinants of who is linked to whom in communication networks: (1) spatial distance, and (2) the homophily—the similarity of the linked individuals in certain social characteristics.’’ However, they point out that ‘‘The general finding from almost every network study that has included space as a variable is that spatial distance is one of the main determinants of who talks to whom, and it is usually the main determinant,’’ (authors’ emphasis). Every task to be performed in an organization must have some location in a spatial arrangement. However, the broad scale physical environment is probably not experienced as the regular Euclidian shapes, angles, proportions and symmetries of buildings, furniture and equipment. The cognitive capabilities behind spatial experience appear to treat physical environments as patterns of elementary forms of spatial enclosure and extension that aid in identifying and localizing everyday aspects of the external world (Schone, 1984). But what is spatial distance and how is it measured, especially in interior physical environments? For example, the layout of an organization’s physical environment is configured by a variety of rooms, corridors, furniture, files, counters and equipment. From organization to organization and department to department, the shape and dimensional properties of these elements vary considerably, even with respect to identical departments and functions, making it very difficult to compare physical distance. Is someone visible and audible but twenty-five feet away in a corridor more distant than someone ten feet away but in an office behind a closed door and a secretarial station? Using shape recognition protocols that recognize spaces in terms of enclosure and extension, space syntax methods decompose patterns of enclosure and extension into topologic graphs or networks (Hillier and Hanson, 1984). These methods can be applied to all types of space including offices and shopping centers (Brown, 1985; and Brown, 1999). The connectivity of each specific space to every other space can be measured to determine the relative pattern of connection. Those that connect more in parallel tend to have logically symmetric patterns. Those that connect more in series tend to have logically asymmetric patterns. Measures indicating integration approach 0.0; measures indicating segregation approach 1.0. All spaces can be rank ordered yielding inequality relationships. Measures approaching 0.0 indicate information pooling structures; measures approaching 1.0 indicate information processing structures. Location, Location, Location: Mapping the Cognitive Environment

Communication is virtually inextricable with cognition: ‘‘. . . when you communicate, your intention is to alter the cognitive environment of your addressees. . . (Sperber and Wilson, 1986).

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‘‘An individual’s total cognitive environment is a function of his physical environment and his cognitive abilities. It consists of not only all the facts that he is aware of, but also all the facts that he is capable of becoming aware of, in his physical environment,’’ (Sperber and Wilson, 1986:39). An individual draws on the cognitive environment to create a problem space. The powerful effects of spatial distance are underscored by Cyert and MacKrimmon (1968). A problem solver in an organization searches for information from essentially two sources—immediate memory and the local environment. Because of an individual’s limited cognitive capacity in the face of the task environment, the organization member usually searches near the area of the symptom and usually relies on other members of the organization for information. ‘‘From our previous propositions concerning time pressure effects, we would predict that the pattern of communication would have a greater influence on non programmed activities carried out with deadlines and under time pressure than upon activities that involve relatively slow and deliberate processes of decision. . . . Where decisions are made relatively rapidly, however, only information that is locally available is likely to be brought to bear,’’ (March and Simon, 1958: 168–9).

Conclusion There is little doubt that since March and Simon’s (1958) comments were written over three decades ago, information technology has made information that might be available anywhere in an organization also available in the local environment. But information by itself lacks a key factor that is essential to communication: intentionality. Intentionality is what can make the problem solver become aware of what is relevant. Sperber and Wilson (1986) distinguish between informative and communicative intentions. An informative intention involves making manifest to an audience a set of facts and assumptions (in this case, about a task to be performed). A communicative intention does this and adds making manifest, not just the facts and assumptions, but the intention to make the information manifest mutually to the audience and to the communicator. Just as an assertion comes with a tacit guarantee of truth, so ostension comes with a tacit guarantee of relevance. Spatial environments structure potential intentionality. The obvious conclusion is that the local spatial environment supporting ostensive faceto-face communication takes precedence over relationships determined by abstract structure in times of rapid decision-making under uncertainty. Downsizing in the 1980s and 1990s was not simply a matter of reducing numbers but of altering communication networks so that they would become more spatially local. Limiting size not only reduces hierarchy; it finesses the obligation to choose between information pooling and information processing structures. Either can be called into play, depending on the problem. Increases in organizational size increase specialization and potential network complexity. The small, autonomous start-up company or unit of a larger one is an intuitive way to change spatial context thereby VOLUME 6, NUMBER 1, 2003


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restructuring patterns of effective intention in the work organization. Thus are real estate markets affected by the way the second-order behavior of real estate users dictates choices from existing and potential real estate inventories.

Corporate Real Estate and Organizational Behavior Introduction

Real estate could be linked to many subfields within management. As mentioned in the introduction to this article, it is obvious that investment in real estate, whether from the equity side, debt side or the investment in corporate real estate, is a managerial process. One of the first researcher’s in real estate to recognize this logical link was Nourse (1989), who commented about his book title, ‘‘Managerial real estate is a study of how to manage real estate as a complement and input into the production of other goods and services. . .The title Managerial Real Estate is meant to show that the principles and problems are a managerial function of business.’’ While a case could be made for exploring the managerial process of investing in debt or equity in real estate, this section concentrates on the link between management as a field of study within business administration, and the area of corporate real estate. As Nourse (1989) noted, corporate real estate is the study of how an organization consumes space over time in support of its primary business function. Over the years, scholars and authors have debated whether corporate real estate should be treated as a cost center, production support center or a profit center. Some support existed for the latter concept in the 1970s and 1980s, but the concept faded in the 1990s. It was hard enough for corporate real estate managers to get the organization to undertake any proactive management of real estate, much less to put a non-real estate company into the real estate business for profit. Thus, the most commonly advanced theory of corporate real estate puts it into a proactively managed asset whose primary purpose is to support the firm’s production function. As a starting point for canvassing the existing research in corporate real estate, the Journal of Real Estate Research has published three special issues on corporate real estate. These are Volume 4, Number 3 (Fall, 1989), Volume 8, Number 4 (Fall, 1993) and Volume 17, Number 3 (1999). For other academic articles, see Nourse and Kingery (1987), Redman and Tanner (1991) and Rodriguez and Sirmans (1996). In addition, Johnson Controls Ltd. publishes an Annual Survey of Corporate Real Estate Practices.4 Over the past few years, a new wrinkle has emerged. The old corporate real estate manager presided over an empire of ‘‘sticks and bricks’’ and was primarily a transaction manager who took orders from somewhere within the firm to acquire and dispose of space. In the 1990s, the International Development Research Council (IDRC) commissioned a series of studies that were published as ‘‘Corporate Real Estate 2000.’’ One of the concepts in this series is that corporate real estate should not be managed reactively, but should be aligned with the overall strategy of the corporation and strategically deployed to achieve the firm’s overall goals. From this

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general concept grew the idea that corporate real estate was not merely sticks and bricks but a workplace. A workplace doe not necessarily have to be an office, but can be a home-based office or a seat at the airport where the worker uses a laptop. The workplace represents the intersection of space consumption over time, human resources and information technology. Thus, after a 1998 IDRC Foundation workshop, the concept of ‘‘corporate infrastructure management’’ (CIM) was developed (IDRC Foundation, 1998). The introduction of human resources (HR) and information technology (IT) opens up the literature in these two fields for real estate research opportunities. There is little in the way of academic research that crosses these fields, but the popular business literature offers ample suggestions for new research opportunities. Human Resource Issues

If real estate is perceived mainly as a cost function within the organization, then of course, the cost of space would logically predominate over other considerations. Recent articles, however, suggest that the cost of space is taking a back seat to issues of employee productivity, employee satisfaction and employee retention. Companies are sometimes providing (either within company premises or within the office building) expensive space for employee amenities such as on-site daycare (Palmer, 1999), coffee shops and health clubs (Dobrian, 1999), on-site shops (including jewelry, electronics repair, dry cleaners, photo developers, ticket service for sports and entertainment and car repair/oil change service in the company parking lot) (Davis, 1995b), and even napping rooms (Anonymous, 1998). Employers are also paying more attention to ergonomic factors in the workplace such as the amount of daylight (McShulskis, 1996), ergonomic workplace design to lower cumulative trauma disorders (McMahan and Phillips, 1999), proper ventilation (Goldman, 1997), indoor air quality (Anonymous, 1999) and general building performance to boost employee productivity (Barreneche, 1997). Workspace and Technology

Several workplace technology trends have received attention in recent years, notably telecommuting (Davis, 1995a) and its relationship to productivity. One survey showed that employees gained a 16% increase in productivity when they worked at home (Allerton, 1996). Another area of interest is communications technology within the workplace and its effects on employee productivity (Hotch, 1998). U.S. home improvement retailer Home Depot has installed kiosks in its stores to recruit new workers. The potential employees can watch a video to see what it is like to work at a Home Depot store before they apply for employment. Using this technology has helped cut employee turnover by 11% (Bond, 2000). Conclusion

Most of the sources used to illustrate human resources and technology issues were taken from the popular press. There is a need for empirical studies in real estate journals to quantify the links among space usage, human resources and technology VOLUME 6, NUMBER 1, 2003


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in the workplace. For example, what types of companies are willing to spend extra money on workplace improvements to help with retention and productivity? Which improvements are profitable and which ones are not? Do the benefits of these improvements go only to white collar workers or are blue collar workers included in the trend? Can the benefit of some of the improvements be measured? An interested real estate researcher can find a wealth of information in the popular press, as well as academic management journals and academic journals dealing with information technology. There are ample opportunities to expand the boundaries of real estate research and to capitalize on the concepts and research techniques that exist in these other fields.

Law and Real Estate Introduction

It seems unusual to entitle this section Law and Real Estate because there is already an established field of real estate law or, more correctly, real property law. The title is meant to imply that there is a link between property researchers and real estate law that has not been fully developed. The problem is that, like architecture and engineering, a separate body of knowledge and professional licensing requirements create a boundary that resists the drift of researchers from other disciplines. While it is true that law students spend years learning the process of legal reasoning, the field is not so arcane and technical that scholars from other fields cannot participate in the mainstream of research. Quality articles appear in respectable journals other than law reviews (see, for example, Trefzger, 1995; Smith, Delaney and Liou, 1996; and Pancak, Miceli and Sirmans (1995, 1997). The use of computer-assisted legal research programs, such as Lexis/Nexis, have opened up legal research to non-lawyers. At this point, a general level of computer literacy includes familiarity with Boolean search routines, so the general process of computer-assisted legal research is not unlike that of other forms of computer-assisted research. Empirical Research

Perhaps the greatest part that property researchers can play in real estate law is the empirical testing of laws and legal concepts. A prime example is the agency issue in real estate brokerage. In the U.S. prior to the 1990s, residential real estate brokers earned commissions in the range of 6% to 7% of the price of the house sold. The brokerage process typically began with a homeowner contracting with a broker to sell the house and signing a listing agreement. If the broker belonged to a multiple listing service (a cooperative service by which brokers pool listings to achieve greater market exposure), the broker placed the property into the listing pool. Other brokers were thus invited to obtain a buyer and split the commission. Under the rules of the multiple listing service (and common practice in the industry at the time), the broker who procured a purchaser was legally a subagent of the seller and owed fiduciary duties to the seller. However, selling brokers frequently acted as if they represented the buyer, and buyers were usually under the impression that the selling broker represented them.

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Thus, the law of subagency was at odds with practice in the industry. A study by the Federal Trade Commission (1983:69) showed that ‘‘When a cooperating broker was involved, 72% of the buyers believed that the cooperating broker was representing the buyer and not the seller. Even 31% of the buyers in transactions where only one broker was involved believed that the broker represented the buyer.’’ A later study by Ball and Nourse (1988) surveyed real estate brokers and sales agents in the State of Georgia and found that the behavior of brokers is often at odds with the legal duties imposed by the conventional representation model. As a result of these and other empirical studies, as well as articles in the popular press, pressure mounted to change the laws of agency representation. During the 1990s, many states passed agency disclosure laws, including Georgia, which substantially revised the law of real estate agency with the passage of the Brokerage Relationships in Real Estate Transactions Act (Official Code of Georgia Annotated, §10-6A1 through 10-6A-14). Since attorneys are typically not trained in quantitative analysis, the property researcher can perform a valuable service to the law by statistically analyzing human behavior in the context of specific laws (or to demonstrate the need for new laws that account for human behavior). Some examples are fair housing laws. Do they work? Are the penalties for violation strong enough to deter violation? Do the laws actually provide a significant amount of discrimination-free housing? Another example is the economic effect of tax laws. Do higher taxes have a measurable effect on property returns (longer holding periods, slowing down the market, driving money into other forms of investments, etc.)? Do disclosure laws work or are they merely formalities that buyers and sellers ignore? Do buyers and sellers properly value the effects of property contamination? Conclusion

The field of real estate law should not be abandoned to attorneys. Computer-assisted research has made legal research easier for the non-attorney. Quantitative analysis of human behavior has changed property law in the U.S., and has further potential for sweeping changes worldwide, once the decision to implement or change laws is based on statistically reliable evidence, not merely anecdotal evidence.

Conclusion While there is a growing body of knowledge in the field generally characterized as ‘‘behavioral real estate,’’ it is clear that the field can be expanded greatly by seeking research opportunities that link the interaction of human beings and organizations with the built environment. The authors hope that this article will encourage researchers to expand the boundaries of their academic and professional disciplines, as well as encourage interdisciplinary research that will both broaden and coalesce behavioral real estate.



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Endnotes 1. The diverse organization of real estate programs have influenced the disciplinary paradigms by which real estate is studied and real estate decisions are formulated. In the U.S., the crux of real estate studies are housed in finance departments with only about eight independent real estate programs are identified. See Grissom and DeLisle (working paper) for more detail. The significance of Grissom and DeLisle’s quantified delineation of real estate programs is to illustrate that regardless of the organizational status of a program of study (at least in the U.S.) a financial / economic perspective must be dominant for faculty career success and the competitive marketing position of the program. 2. Compliance with the general theory is usually argued to be maintained because the separate decision makers’ objectives are delineated to result from a maximization objective for the separate parties. However, the analysis has now required a bifurcation in choice models that may be interdependent, though independence is assumed for risk analysis. A more thorough behavioral analysis may have to incorporate conjectural measures and a shift from risk analysis to the treatment of uncertainty. 3. The importance of institutions on economic behavior and choice was so dominant in Ely’s thinking that he tried to incorporate Christian principles into economic decisions. He established a curriculum of economics courses with numerous land economic offerings throughout the country via the YMCAs in the 1920s (see Nelson, 1997). This attempt was thwarted by the depression of the 1930s. His personal involvement with institutions resulted in an academic trial when he supported the rights of unions to strike in 1898. The outcome of the hearing led to the motto used by the University of Wisconsin. 4. Johnson Controls, Ltd., Randalls Research Park, Randalls Way, Leatherhead, Surrey UK, KT22 7TS.

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