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Lessons from other disciplines and implications for real estate
Department of Finance and Economics, Mississippi State University, Mississippi, USA
Keywords Heuristics, Real estate, Operational research, Influence Abstract Behavioral research is an accepted research paradigm in business disciplines outside of finance including management, marketing and accounting. This paper looks at these disciplines and proposes goals for increasing acceptance of this form of research in real estate. Primary goals include investigation of actual heuristic use, concentration on expert decision makers, either as a group or in comparison to novices, incorporation of additional theory advocating functional heuristics, incorporation of real estate specific theory and identifying both theoretically and empirically when, why and how heuristic use may bias the decision process.

Behavioral research into heuristics and bias as an academic pursuit
William Hardin III


Academic papers: Behavioral research into heuristics 333

Introduction Finance and real estate researchers have been late in the acceptance, or at least partial acceptance, of behavioral theory as a paradigm for the study of decision making. This is in contrast with other areas of business specialization including marketing, accounting and management which have a tradition of using cognitive behavioral theory to both describe the decision process and prescribe possible methods for improving the decision making environment. This paper presents a broad overview of the general theoretical concepts and prior empirical research concerning decision making and heuristic[1] use in real estate and other business disciplines and advocates the development of a theoretical foundation for decision making within a real estate framework. The first section addresses the theory of human information processing and builds a foundation for real estate as an area for research. The second section reviews major non-real estate theoretical concepts and heuristics. Empirical investigations are presented in section three while the final section reviews real estate studies and outlines possible areas suitable for real estate-specific theory development and empirical investigation.

Journal of Property Investment & Finance, Vol. 17 No. 4, 1999, pp. 333-352. # MCB University Press, 1463-578X

JPIF 17,4


Human information processing, intelligence, expertise and real estate The theoretical foundation used in most studies of the decision making is derived from Simon (1957, 1978) and Newell and Simon (1972). Simon (1957) postulates that decisions are made within a subset of all potential solutions. Limitations in the use and review of all potential solutions is a rational behavior as other factors, including search cost and data evaluation, impact a specific individual's utility. Newell and Simon (1972) and Simon (1978) expand and refine Simon's initial work by emphasizing individuals' cognitive limitations and by developing a theory of human information processing that integrates limitations in short-term memory with the decision making process. Further theory developed by Evans (1989), Baron (1985) and Shanteau (1992) emphasizes that the use of schemas[2] or heuristics is fundamentally a rational response to expanding levels of information. Newell and Simon's (1972) and Simon's (1978) extensive foundation of human information-processing theory can be presented in simplified terms. An individual interprets a task (decision to be made) and tries to formulate it into a known, structured problem space[3]. The selection of a problem space, or schema, is an interactive process composed of information processing, task environment comprehension, and problem space definition. Interaction is facilitated by information-processing heuristics at the task environment[4] interpretation stage and the problem space generation stage of the decision process. The use of heuristics reduces the number of alternatives available for problem resolution. Simon's fundamental argument is:
problem solving behavior is produced by a small set of elementary information processes, organized into strategies or programs (Simon, 1978, p. 279).

When properly applied, information-processing heuristics reduce search time by providing for proper task definition and problem space generation. The ability to quickly access and effectively process data is the essence of domainspecific expertise. In fact, Newell and Simon (1981) define intelligence based on an individual's capacity to use simplifying heuristics. There is no limit to the amount of information that is available for search, or in the number of potential search patterns, but in order to function in an ill-structured environment humans must be able to determine what data are relevant and what relationships are plausible. The decision maker must interpret the task environment and generate a problem space that allows for the solution of the task. Building on the Newell and Simon framework, Evans (1989) postulates that experience and training will allow for better task recognition and greater development of problem spaces. Heuristics are preconscious allowing for the rapid acquisition and implementation of data search procedures when faced with familiar tasks. When faced with a familiar task, the decision maker uses a preconscious, pre-developed schema that determines the task and the production rules available to resolve the problem. The schema is domain

special attention is required when specifying expertise because without . These initial four factors require the decision maker to have sufficient knowledge and experience to develop data acquisition heuristics that work. and unpredictable problem parameters. The model's first factor is domain knowledge including textbook knowledge plus experience gained by working in a real world problem solving environment. the characteristics of the task environment will impact problem resolution. Shanteau's theory provides two important insights. as traits required of an expert. for Behavioral incorporating that knowledge into the decision making process. decomposable. In investigating human information processing in a real estate context. have agreed upon stimuli. responsibility. Even if agreement is reached on the actual task to be solved. or procedures. it includes simplification strategies for data acquisition and the use of preconscious decision procedures or heuristics. In the context of real estate research. Shanteau's Theory of Expert Competence includes five specific factors affecting an expert's competence to address sources of potential bias found in empirical research on decision making presented by both behavioral and cognitive researchers. uncertain stimuli. and an ability to adapt. The first is a requirement for domain-specific expertise. and have predictable problem parameters. Bias in decision making may occur through an inaccurate perception of the task or the incorporation of poorly developed schema. Baron (1985) research into argues that the selection of one schema may result in the selection of one set of heuristics relevant information while the use of another schema may result in a different set of relevant information.'' An Academic papers: expert has domain-specific knowledge and a procedure. Shanteau postulates that in more dynamic situations actual task interpretation and presentation are difficult. The third factor is cognitive skill and involves the expert's ability to determine relevant data cues from complex and stressful external environments. the development of additional theory on when schema misapplication may occur is necessary and is partially provided by Shanteau (1992) with the prerequisite to the misapplication of schema. Therefore. being sufficient domain expertise for schema development. When humans are asked to solve tasks that are inherently difficult to master due to poor feedback. The fifth and final factor affecting expertise is task characteristic.specific and includes related ``declarative and procedural knowledge. The second factor is psychological traits and includes self-confidence. Each schema contains knowledge from a particular 335 domain that serves as a guide to relevant data selection. In summary. the task must be repetitive. human information processing theory indicates that humans obtain domain-specific schema that lead to optimal decisions within the framework of their domains of expertise. For experts to show good performance. uncertainty with regard to the variability of inputs and outputs. The fourth factor is called decision strategies. allow for substantial feedback. of course. heuristic use is likely to lead to sub-optimal decisions. objective. Bias may occur because of the misapplication of schema that control processing heuristics or underdeveloped domain knowledge.

The description of the individual is below: . The researchers then asked respondents to determine to which profession the individual belonged. the existence and effect of heuristic use can only be inferred as a general decision making condition. an over-reliance on the use of naõ Ève or novice study participants may render real estate based research simply replications of studies showing that bias is greatest in general cases with limited domain-specific expertise. Second. Task definition and the researcher's definition of optimal may lead to the appearance of heuristic bias when. Real estate decision making provides an opportunity to substantially expand empirical research provided this research conforms with a general theory of functional heuristics where sub-optimization may occur due to limitations in task definition. actual expertise or environment. A description of an individual was developed. Heuristics and bias The focus of much of the general information-processing literature has been on situations where the use of heuristics may bias the decision process. For example. Heuristic bias would occur because domain knowledge is insufficient and general informationprocessing heuristics are inadequate to address the task. They found that humans interpret a sample to be more representative of the parent population than it actually is. limited feedback and numerous overlapping domains of expertise ± a dynamic research environment ± requiring substantial due diligence by researchers. 1972) observed and defined the representative heuristic. objective and decomposable with substantial feedback. They are identified below because an understanding of these heuristics is essential for evaluating their applicability in a real estate context. Their definition of the representative heuristic allows that bias occurs as the inability to properly assess the probability of an event over different sample sizes and populations affects decisions. The observance and definition of additional heuristics has also occurred. an attempt by appraisers to cognitively confirm a sales price may be a functional[5] heuristic even if it does not meet the criteria of normative appraisal models. Real estate decision making takes place in an ill-structured environment with uncertain stimuli. and the anchoring and adjustment heuristic ± along with the positivity heuristic defined by Evans (1989) have been the center of much research. Tversky and Kahneman (1974) provide an example of the representative heuristic and how it might cause bias. Tversky and Kahneman (1971. Consequently. Because effective heuristic development requires a task to be repetitive. in fact. In a thesis on judgment. none exists. Subjective assessment of probability may be at odds with actual probability.4 336 expertise at some level.JPIF 17. the availability heuristic. the actual task definition is critical. The three heuristics identified in the early 1970s by Tversky and Kahneman ± the representative heuristic. but these four heuristics remain the most studied and most acknowledged within the literature. researchers must control the research environment to adequately test for heuristic use and potential bias.

prior probability of outcomes. Academic papers: Behavioral research into The authors then listed a number of professions and asked the respondents to determine the profession to which Steve belonged. Individuals try to get ``close'' and then make adjusts from an initial point by obtaining and using additional information. and a passion for detail. and misconceptions of chance. but only as an extension of the general use of heuristics. Evans. The four foundation heuristics have provided a framework for behavioral research within a real estate framework. or environment.common response. Bias occurs when the initial anchor is incorrect. argues that the concept of confirmation bias is not correct and that confirmation bias is a function of ``cognitive failure'' in the human information-processing system developed by Simon. Librarian was the most heuristics Steve is very shy and withdrawn. 1989. was at odds with the base-rate frequency[6] of librarians when contrasted with the general population and other professions. bias occurs because of data retrievability. 43). Bias occurs when data that should be deemed relevant is not because of a preconscious search for positive feedback. but with little interest in people or the world of reality. Furthermore. or there is an overly optimistic estimation of conjunctive probability. invariably helpful. p. 337 Humans are looking for ways of confirming their individual interpretations of the world via their perception of the task environment and determination of the problem space. Much of the literature on the decision making process concerns the anchoring and adjustment heuristic as it is the most easily operationalized. Such a response. he has a need for order and structure. however. People can be insensitive to sample size. however. Bias occurs because once a task or situation has been perceived in a certain way such a perception is difficult to change. 1973) states that individuals assess probabilities based on their familiarity with a certain task. The availability heuristic restricts the formation of more effective heuristics unless feedback demonstrates that bias has been created. Evans' arguments are based on an extension of the concept of a confirmation heuristic meaning that humans seek data that is fundamentally consistent with existing beliefs. Evans proposes a positivity bias and states: Positivity bias is assumed to arise from the preconscious heuristic processes which determine the locus of the subjects' attention (Evans. and illusory correlation. Evans (1989) uses the work of Tversky and Kahneman and others as a foundation for his synthesis of heuristics and bias and definition of a positivity bias. theories and cognition. The heuristics represent a call for descriptive research that . idea. insufficient adjustment is made. Specifically. This heuristic simply means that individuals start at one place in a decision matrix and adjust from that initial point. The availability heuristic (Tversky and Kahneman. A meek and tidy soul. Humans attempt to frame a decision based on prior situations confronted and successfully negotiated. The anchoring and adjustment heuristic is the last major heuristic defined by Tversky and Kahneman (1974). salience.

neutral. The facts where manipulated to evidence positive. A brief review of normative lending and real estate models and an analysis of heuristics. Theory has been empirically tested requiring theory refinement and experimental design changes.4 338 will allow for the actual confirmation of the existence of systematic data acquisition. The goal of this second level would be the determination of what tasks and environments create heuristic bias. none of the experienced lenders approved . the respondents either approved or declined the loan. and were asked to measure their confidence in the decision made and the probability of loan repayment. and experts from other business disciplines are presented. and differences in data processing between novices and experts. but does provide exposure to the diversity of areas of interest and the sophistication of the actual research design process. The breadth of the subjects that have been investigated empirically shows that theory. The noted research is helpful in design evaluation for real estate research and allows real estate researchers a feel for the acceptance level of heuristic study in other fields. After being presented these facts. or negative accounting performance (a 3X3 design). Specific heuristics have been researched. Normative decision models Beaulieu (1994) studied the normative Five Cs of Credit Model[7] and lenders' actual use of this model in making a loan decision. practice and real world applications must all be addressed. neutral. The investigation was specifically concerned with the use of character and accounting data as components of the loan decision. There is a need to describe the decision process without accessing a correct solution. If expertise requires systematic data search then a first step in the research should include confirmation of some level of expertise by showing that experts actually use systematic data retrieval. or negative character and positive. the potential of information-processing heuristics to cause bias. The research presented is by all means not all inclusive. novices. When confronted by a scenario with negative accounting performance. Participants included students in a commercial lending training school who were given a general loan scenario[8] and then given 26 facts about the company providing information for character analysis and credit analysis.JPIF 17. as have data acquisition strategies. the goal being theory testing with some applicability to practical business decision making. Results indicated that experienced lenders weighted the negative accounting more heavily than lending novices. At a second level. Normative and descriptive modeling have been investigated. the existence of sub-optimal results then can be addressed. bias. Empirical research Research on the business decision making process has included actual versus normative decision making. The definition or replication of bias caused by heuristic use in non-domain-specific areas of interest is no longer enough unless theory development is included or direct real world application is possible.

A primary reference for this literature is the Handbook of Consumer Behavior (Bettman et al. Consumer behavior research There is a large volume of research in the consumer behavior literature on heuristics. provides evidence that the normative Five Cs of Credit Model taught in business schools and in bank training programs is not always applied.the loan even with positive character attributes. or schema.. most studies support the theoretical foundation found in the psychology literature. low) design to determine if geographic familiarity impacts the data acquisition strategy of expert appraisers. He was also able to show that the pattern of cue utilization is similar in both appraisal situations. In a general context. In an investigation of the decision making processes used by appraisers when compared to the normative model prescribed by theory and promulgated by the Appraisal Institute and government regulation in the United States. two major participants in the real estate industry. there was no ranking of data that could be used to determine relevant data cues by lender group. since actual company heuristics financial data were not presented to the respondents. preconscious information processing. This indicates that appraisers use production rules that deviate from the prescribed model. Diaz found that experienced appraisers dealing with both familiar and unfamiliar demographic areas deviated from prescribed appraisal practices. A sample of relevant. instances of product success and failure . Folkes (1988) studied the availability heuristic in a consumer setting using four separate experiments. well-designed empirical research is presented below. The ability to describe the decision process sufficiently will be essential for the comparison of normative models and actual decision making processes especially if one accepts that heuristic use is functional. Within the context of this paper. but are functional in the actual determination of an appraised value. consumer choice and data acquisition strategies have been shown to be subject to heuristic bias. Unfortunately. bias. Diaz used a single factor (familiarity ± high. Beaulieu and Diaz provide evidence that lenders and appraisers. Diaz (1990a) found substantial differences. Within the real estate research arena. the decision making process remains underinvestigated. What is evident from these studies is that the human decision process is often simplified as data are determined to be either relevant or irrelevant within the context. This is further support for Kanaan's (1993) commentary on the need to redefine normative models and to determine what actually occurs when individuals make decisions. The 339 study. however. The experienced lenders Behavioral more heavily weighted the accounting data and were less concerned with research into character in all the scenarios presented. 1991) as well as the Journal of Consumer Research. In Study 1. and schema development. of the decision environment. deviate from prescribed decision models. Novices facing the same Academic papers: situation approved the loan 31 percent of the time.

the distinctively named products were judged to have a greater probability of failure. Likelihood estimates were not correlated with the recall of successful instances. Sujan found that both experts and novices attempted to use a categorical strategy. In the second part of Study 4. Recall of successful instances was correlated with frequency of use while recall of instances of failure was based on the distinctive source of the failure. The students that were dependent on the escalator system estimated that the escalator was broken 54 percent of the time while the other student group estimated a failure rate of 31 percent. Three conditions were studied ± failing products with non-distinctive names. In Study 2. Sujan (1985) tested how prior knowledge affects the evaluation process. In all instances studied. Sujan finds the experiment's results: . In estimating failure rates. failing products with distinctive names. Folkes observed the amount of time respondents were attentive to the products in the aforementioned scenario and found that the respondents paid more attention to the ineffective outcomes with distinctive brand names. In Study 3. The distinctive nature of walking up a broken escalator was thought to have increased the saliency of the escalator failure.4 340 (the product used in the case was a rust-stain removal product) were presented to 46 undergraduate students in combination with more or less distinctive names. it was possible to segment the sample into students that used a combination of escalators and stairs or an elevator and students that only used an escalator (students could access the building's sixth floor using a combination of escalators and stairs or an elevator while the first four floors were served by an escalator system). leading to a biased result. In the first part of Study 4. Experts are able to evaluate deviations and better assess categorical variations. Students were asked to estimate the percentage of time the escalator was broken. but were correlated with the recall of instances of failure. The piecemeal (attribute by attribute) approach to information processing was compared to categorical information processing where an item is grouped by class in a schema-driven process. 97 students completed a questionnaire to test whether instances of failure were more easily recalled than instances of success. caused by distinctiveness. The decision maker may create a schema to address distinctive features of the task while relevant data are not accessed.JPIF 17. Increased saliency. and half-failing and halfsucceeding products with brand names. the respondents indicated the likelihood of instances of success or failure. but that experts were better at understanding and evaluating deviations from the prescribed category. Folkes found that there was bias in judgment caused by the availability heuristic: individuals overestimated failure rates after exposure to distinctive situations. Folkes investigated students' estimation of the failure rate of an escalator in a major campus building. Using a complex verbal protocol design with cameras as the basic stimuli. Due to building design. is likely to influence the perception of relevant data in a decision situation.

1985. Consumers are influenced by heuristics that can bias. Janiszewski (1988) found that attitude formation occurs preconsciously. Using contralateral conduction and the physiological premise that the left and right hemispheres of the brain process differing forms of information. and process information on a preconscious basis. p. can one design studies of stigma. In a study of preconscious data acquisition and recognition. nationality or gender using a cognitive approach? Can one simply show systematic data acquisition strategies? Do real estate experts recognize anomalies in value or price? . Expertise is manifested by systematic data search and data retrieval. within the realm of real estate.'' or any other market driven effect? Can one test for the influence of race. In less complicated decisions. Brucks analyzed the way that novices and experts search for data. This lends support to Simon and Newell's (1972). Simon's (1978) and Evans' (1989) hypotheses that information processing has a preconscious component. do purchasers or investors develop preconscious schema based on visual stimulation? Consumer behavior research. simplify data search within domain-specific knowledge. 341 This finding supports the postulate that simplification heuristics are indicative of expertise. Information is processed preconsciously before humans are conscious of the presence of information. there is limited need for simplification heuristics so they will not be evident. Expertise will make individuals more effective at data acquisition. but such efficiency will only be evident when situations warrant. domain-specific knowledge is a prerequisite. An interactive process was created that permitted the study participants to ask for data and have the data presented via a computer allowing Brucks to trace data cue selection. Using sewing machines as a product class. 1985. the influence of ``view'' or ``curb appeal. provides support for the information-processing capabilities proposed in the psychology literature. Janiszewski used evaluation of a print ad to study if the evaluation of an ad could change without a change in ad recognition. 12). use schema to simplify the information search process. Also. as evidenced by the review of only a few of the major studies available from the literature. In real estate.information search. Academic papers: Behavioral research into Brucks (1985) completed a study of the effects of product knowledge on heuristics consistent with a general schema perspective that suggests that schema-consistent information can be chunked into large perceptual units and processed more easily (Sujan. 45). So. Janiszewski was able to show that evaluation can take place without recognition. p. Brucks' primary finding was that when humans are faced with complex decisions: objective knowledge was associated with seeking less information about inappropriate alternatives and with using a pattern of search that exhibits a greater degree of variance in the number of questions asked about the considered alternatives (indicating greater search efficiency) (Brucks.

3). In the auditing task environment (two experiments). Ashton and Ashton (1990). propose that confirmation bias can only be measured within the context of the decision being made. the authors found that financial presentation influenced the level of variability expected in a firm's performance and that compliance sampling was influenced by the method of sampling error estimation. the data. auditors were studied in an auditing task environment and auditors and executives were studied in a non-auditing task environment. pre-audit company presented data influenced auditors. The best accountants are able to look past the numbers. In an investigation of the data acquisition heuristics used by equity analysts. Heuristic bias is a common research topic as judgment is generally required within the accounting field. In the non-auditing environment.4 342 Accounting research Like consumer researchers. The key is at what level of variability in present versus past performance should additional investigation be required when assessing a specific income or balance sheet account. but the executives did not exhibit negative responsiveness. accounting academics have embraced cognitive. Because ``the purpose of auditing is to enhance credibility'' (Ashton and Ashton. The authors argue that many prior studies have misrepresented the function of an auditor. as that is part of the audit function. Biggs studied 11 experienced equity analysts and found that the analysts used two basic decision strategies ± historical and predictive ± to determine which of five paper companies was the most likely to be the top performer over the next fiveyear period. human behavioral research. training and experience lead to search heuristics that focus on negative data: the auditor seeks to find negative data. the auditors were more responsive to negative rather than positive financial data. the auditors responded in a similar manner. In two tests of senior auditors from the then Big Eight accounting firms. Auditors may be susceptible to historical data trends when interpreting current unaudited results. in an important empirical investigation of confirmation bias. In both instances. Ashton and Ashton propose that experience and . Using verbal protocol. Biggs (1984) traced the information acquisition strategies and decision making capabilities of expert financial analysts.JPIF 17. Several of the numerous noteworthy empirical studies from this literature are summarized below as is Smith and Kida's (1991) review of heuristic research in accounting. and generate information. The convergence of data acquisition strategy and decision methodology shows that training and expertise development can cause groups of experts to frame a decision similarly while also allowing for the fact that experts can and do frame the same task differently. p. In a study of the anchoring and adjustment heuristic and the potential for bias in an accounting setting. In the sampling case. In a series of tests. results showed that senior auditors did not properly assess the representativeness of a sample versus the population of interest. Kinney and Uecker (1982) found that the anchoring and adjustment heuristic can cause bias in at least two situations: compliance sampling and completing financial analysis. 1990.

Empirical research in the accounting discipline is supportive of the use of heuristics while recognizing the need to know how and when heuristics cause bias. both experts and novices anchored on the listing price. 473) note evidence: suggesting that specialized heuristics may be used for tasks within an expert's domain. Even when the anchor price was less credible. The authors believe that because auditors. 1991. 16). but is instead a learned functional heuristic. and a minimum selling price for a specific house after reviewing information on the house and after being exposed to one of four levels of listing price. the accounting profession is an 343 excellent industry within which to study judgment and decision making. p. . p. All participants provided estimates of market value. however. The research also provides a foundation for judgment research within a real estate context with goals of identifying systematic data acquisition and understanding when and why heuristic use might bias a decision. Finally. ``auditors appear susceptible to the same biases found in the heuristics literature'' (Smith and Kida. 1990. are paid to make judgments. They note that although much research in auditing has used experienced professionals. Can we differentiate situations in real estate where expertise has little effect? Does a lack of information in a certain situation make experts more like novices? Real estate research Northcraft and Neale (1987) provide one of the first studies of heuristics and bias in a real estate setting. but not necessarily residential valuation impact how auditors track and assess data. as a matter of practice. whereas basic heuristics may be used in situations in which the individual lacks the information or expertise to indicate a strategy better suited to a particular task. The research shows a need for additional research into possible heuristic use and bias in real estate. 473). Also. The anchoring and adjustment heuristic was studied in a home valuation context. Cognitive heuristics and Academic papers: incentives lead to a search for negative data as ``negative evidence may be Behavioral considered good news for auditors'' (Ashton and Ashton. A total of 48 undergraduate students participated in the study as novices and 21 real estate agents participated as experts in residential valuation. Smith and Kida (1991. anchoring was evident. listing price. The use of sales agents. research into Smith and Kida (1991) provide an extensive review of heuristic research in heuristics the accounting profession. The authors also believe that training and experience can mitigate heuristic bias. a price they would actually pay. Empirical studies support the basic research developed by psychologists that shows the prevalence of heuristic usage. then the sales agents' anchoring is not evidence of heuristic bias. as experts unfortunately reduces the strength of the results as sales agents are familiar with pricing techniques. p. if in the actual market for residential property sales agents are generally good at estimating value. but that the complexity of real world experiences makes the elimination of bias problematic. In all instances.

The residential appraiser may define his task as the justification of a sales price as opposed to an estimate of market value. however. Levy (1997) found that naõ Ève experiment participants evidenced a recency effect (possible anchoring) caused by the order in which value estimates were generated. The estimate of a specific property's selling price was affected by the prior property on which selling price was estimated. volume oriented. ``Does the sequencing of house showings by sales agents affect which house a purchaser may decide to buy?'' Gallimore (1994) studied three information-processing heuristics including the anchoring and adjustment heuristic. as residential appraisal has become very price competitive. it begs the question. The research confirms general heuristic use when faced with an unfamiliar task. This would confirm theory indicating that heuristics are functional. Such a practice. anchoring would have been more likely because the expert's appraisal valuation would have been considered more relevant. Expert residential appraisers considered fewer comparable sales than novices did. . may be a rational response.4 344 In an extension of prior work on normative decision techniques in appraisal. and the dilution heuristic. anchoring to a report generated by a fellow MAI. This may indicate a generally functional heuristic when experts are faced with insufficient domain-specific knowledge. In a subsequent study. Diaz also found that the dispersion in value estimates for expert appraisers was not impacted by the anchor. experts and novices in an ill-structured appraisal environment did not anchor to the valuation estimate of an anonymous expert (Member of the Appraisal Institute (MAI)). Diaz (1990b) found that the information-processing techniques used to select sales comparables differed by level of appraiser expertise. Concurrently. may be learned. In the test of the anchoring and adjustment heuristic. Although heuristic theory might propose an anchoring effect if the anonymous expert was deemed relevant. The comparable selection process used by the expert appraisers indicates a schemadriven process that is cognitively efficient. In a second study by Diaz (1997). the ability of less relevant data or noise to reduce the use of relevant data. and less geared to actual value determination. but was reduced for novices. Diaz and Hansz (1997) found that appraisers valuing property in areas within which they have limited knowledge anchor to an anonymous appraiser's prior opinion. If a specific appraiser acknowledged by the field and known by those in the field to be an expert in appraisal was suggested as the expert. the fact that the MAI was anonymous may have mitigated the respondents' use of the anchor. the respondents were segmented into two groups by the incorporation of two versions of the following question in the questionnaire: Which of the following statements would you agree with? Circle letter A or B at the end of the statement with which you agree. Without actual domain(market) specific knowledge.JPIF 17. using a survey methodology to obtain 276 responses (from a mailing of 498). the use of less relevant information or feedback due to the timing of exposure. but may lead to bias. the recency heuristic.

1994. Black and Diaz (1996) showed in a controlled experiment using graduate students and real estate professionals that asking sales price can serve as an anchor. Respondents were segmented into two groups by presenting two sequences of comparable data that the respondents could use to adjust their initial confidence intervals. that the general use of heuristics and their potential biasing effect were present even with more experienced respondents. Academic papers: Behavioral B (Gallimore. accountants. is possible as six (6) of fifteen (15) negotiating groups with a ``high'' asking price were unable to reach a negotiated price even when instructed to do so. and real estate appraisers. anchoring may have been evident. respondents were given a 50 percent confidence interval of the market value of a property on a per square foot basis. Gallimore was able to show that heuristic bias might exist in the valuation of real estate assets. In cases where the negotiations were concluded. p. The group receiving the confirming comparables last were more confident in their value estimate than the group receiving the disconfirming comparables last. A weakness in the study was the fact that no controls for expertise were noted and students in real estate are taught that having a well-defined and accurate asking price is a requirement for selling a property. To investigate the dilution heuristic. The fact remains. A later question embedded in the questionnaire asked for the respondents to state the amount of variability that is typically found in an appraisal. An alternative explanation to the experiment's results. To test the recency heuristic. This confirms prior decision research on consumers. No presentation effect was shown as the two groups were equally confident in the estimated rental rate. however. two groups of respondents were given data on the rental rate of a retail property either simultaneously or on a sequential basis and asked to state their level of confidence in the given rental rate. however. Black (1997) did a follow-up study to determine if a better presentation of salient facts might mitigate anchoring. The anchoring and adjustment heuristic has also been investigated in the context of real estate negotiation with mixed results. but the method of analysis (questionnaire format) might not be realistic enough to make the respondents expend sufficient cognitive effort to mitigate the evidenced bias.version used a 20 percent level. This is preliminary confirmation of another area where heuristic bias might be likely. The comparables presented were in one of the two following sequences: two confirming comparables followed by two disconfirming comparables or two disconfirming comparables followed by two confirming comparables. 102) research into One of the questionnaire versions used the 5 percent level from above and one heuristics Freehold prices typically vary by 5 percent or more on either side of average price Freehold prices typically vary by less than 5 percent on either side of average price A 345 . The respondents with the 20 percent question provided a statistically significant higher estimate of variation than those respondents with the 5 percent question.

actual domains of expertise may be narrow and definition of experience or expertise critical. Evans (1989) expands this theoretical foundation .4 346 Hardin (1997) in a descriptive study of experienced real estate and commercial lenders found that experts do have identifiable data search patterns and that these patterns differ by domain of expertise. The authors contend that this may be a reason for the smoothing effect found in many real estate indices. In this study. In a dynamic environment like that found in real estate. why and how have not been adequately addressed. In a longitudinal study requiring the re-appraisal of real property. In a study of appraisers in the United States and the United Kingdom. Diaz and Wolverton (1998) found that appraisers might anchor to their own previous estimates of value. but culturally sensitive. Any inferred bias would have been due to different task definitions. What is unique about the study is that substantial insight was provided without the need to test for heuristic bias. Progress has been made in expanding descriptive research and in expanding research to experts within the field of real estate. Gallimore and Wolverton (1997) found that task definition may differ by country due to data availability and requirements on the disclosure of pending sales price. if the researcher postulated one correct data acquisition strategy for both groups. The information-processing paradigm has been introduced to the real estate literature and to real estate academics. feedback and domain-specific expertise. effective heuristics. then bias would have been manifested. 1978) and Newell and Simon (1972) have developed a theory of human information processing that acknowledges human weaknesses in data acquisition and interpretation while allowing for an overall framework that permits the development of successful data simplification heuristics. two groups of experienced lenders evidenced different data relevancy and acquisition strategies. it was concluded that the appraisers were less likely to make adjustments in value. Hardin could have tested the anchoring and adjustment heuristic. In short. Bias caused by heuristic use has been identified with novices.JPIF 17. but instead allowed that each group would have functional but different heuristic use based on training. but the when. The differing data acquisition strategies led to different cue utilization and different lending decisions. although in the United Kingdom sales price knowledge also served as an anchor. Advancing from this foundation should be the next task. Choice of comparable sales differed by country. This research was descriptive and provides support for domain-specific. Simon (1957. A general acknowledgement of the potential biasing effect of heuristic use can be made with regard to real estate decision making. Implications Integration of theoretical and empirical research There is a substantial theoretical foundation on the development and use of information-processing heuristics. experts and in certain instances where study participants have limited data or some form of task unfamiliarity.

and Simon. major real estate related decisions are infrequent. However. What role do experts play and are there limits to their effectiveness? Is the expert the decision maker or just in a position to influence the decision maker? Real estate research in decision making should incorporate Shanteau's (1992) Theory of Expert Competence. Additional studies at the real estate specialization level might use novices to show potential heuristic bias with subsequent studies comparing experienced practitioners with novices. or experts given little data. Heuristic bias found by . but only with feedback indicating that past data selection and heuristics usage have been biased. but to suggest that its quantification may be limited by its specialization. While acknowledging the potential biasing effect of heuristics heuristics. even with the development of preconscious and conscious information-processing skills. Since for most individuals and even corporate and investment entities. This area has substantial implications for the use of experts in any situation. In essence. the role of the real estate expert is a crucial area for study. Do experts and novices exhibit the same behavior when little relevant data are presented and different behavior when given a choice between relevant and irrelevant data? Concurrently. the manifestation of real estate expertise may be limited because of the actual characteristics of the task that is being solved. The use of information-processing heuristics will be productive when coupled with domain-specific knowledge and sufficiently developed cognitive skills that allow for effective data retrieval and interpretation. and do. especially with naõ Ève or novice decision makers?'' The position taken in this paper is that it is not enough to only show that novices. training and education. A critical question to be asked is whether lack of data or lack of actual heuristic development might be the cause for observed sub-optimization in real estate decision making. real estate researchers must move forward with substantive theory development and research in addition to research at the novice level. A final area of interest would be the interaction between real estate experts and the actual decision making process. but concludes that the inherent human proclivity for biasing heuristics can be offset via experience. Hogarth (1981) emphasizes that heuristics are Behavioral generally functional and that feedback and training are important in the research into generation of heuristics. rise above minimal cognitive responses when making a judgment or choice. Human information processors can. The question that begs to be asked is ``Is it enough for real estate researchers to show that heuristics affect decisions in real estate. Hogarth concludes that experience and feedback should mitigate much include the use of schema as well as a potential positivity bias in the human Academic papers: information-processing system. Reasons for heuristics bias would be developed. why do they 347 continued to be developed and used? Baron (1985) is in agreement with the theoretical work of Newell and Simon. if the heuristics are always biasing. The development of real estate-specific decision making theory and subsequent empirical testing has to be addressed. This is not to say that expertise does not exist. may be subject to heuristic bias.

Real estate decision making is composed of novices. as previously noted.JPIF 17. These procedural heuristics. but not non-existent. Some domains cannot or do not provide for adequate. Diaz (1993) may provide a foundation for this theory with his defense of real estate as a separate academic discipline. being functional heuristics. since functional expertise can be. real estate law. Finally. and is. When faced with a real estate decision his domain-specific knowledge and heuristics are . This is a major task and is of paramount importance. numerous experts and overlapping domains of expertise. developed in real estate specializations. lead to differing lending outcomes. the very existence of expertise may limit macro-level decision making as task complexity limits general ``real estate'' expertise. once again. a generic argument for heuristic bias due to the ill-structured environment of real estate is not sufficient. Consequently. However. in the context of real estate research. For example. Can we show that real estate practitioners develop procedural knowledge and problem resolution related heuristic use? The outcomes from employing such knowledge may differ. but its application may be similar across tasks. as specified above. Hardin (1997) shows that differing groups of real estate lending professional develop procedural heuristics that are job or task dependent. Investigations of declarative and procedural knowledge. Consequently. For example. but are not indicative of heuristic bias. timely. a theory of decision making may be formulated. and theory development will allow for a better foundation than allusions to an ill-structured environment and task.4 348 researchers may only be indicative of poorly specified expertise or a lack of its application during the research process. A belief that heuristic development is cognitively beneficial should be a theoretical foundation. the ability to develop both procedural and declarative knowledge should be investigated with the goal being the determination of the extent of both types of knowledge. a real estate attorney is challenged on a daily basis with changes in code and enforcement and must expend much effort to retain domain-specific expertise. however. For example. Real estate research may be captive to Hogarth's (1981) critique that heuristic research is enamored by definition while losing sight of the fact that heuristics must be useful or they would not be developed. Real estate-specific theory of when. the attorney may not be an expert except in one area of specialization. there is a lack of cogent theory with most studies attempting to say that people facing a real estate decision are subject to bias primarily due to the fact that real estate is composed of ill-structured decision making tasks. Research questions should focus on the actual manifestation of expertise and when and why heuristic bias might occur with the base case. why and how heuristics affect real estate related decisions is needed. and relevant feedback while many task environments have such variability in input data that the development of the cognitive skills necessary to manifest expertise is limited. If we look at the real estate industry as an overlay of all business disciplines with real property as the focus. The interaction of real estate decision makers and the use of expertise can be incorporated into theoretical development.

one should see more heuristic use but less heuristic bias. The research would be more ``mainstream'' decision making with real estate as the avenue for investigation. people are subject to bias through the use of general heuristics. but is necessary to advance knowledge. This choice is to concentrate research on procedural knowledge. one will have to move to real world. This can be done with descriptive studies to determine the existence of informationprocessing heuristics. and Hardin. real estate researchers are faced with several choices. The first and foremost is whether they simply want to replicate the existence of heuristics in a new discipline. real estate research must incorporate practice and theory. empirical research. but theory has been generally lacking unless one uses the general heuristics and bias literature. but must be tempered by the lack of discipline specific theory and few real estate outlets for publication. It is possible that such 349 theory would dictate that heuristic bias exists at the novice level due to insufficient domain knowledge. Questions of the definition of an expert persist. This is difficult as it is time consuming and extremely unappreciated. are biased by heuristics. why and how Behavioral heuristics affect decision making. and or. A theory of real estate decision making should postulate when and why heuristic bias occurs with novices and experts and when real estate decision makers interact with one another. There is substantial difficulty in selecting this route. If this is not the case. At the expert level. Gallimore. Wolverton. A global theoretical framework is needed to address this Academic papers: type of interaction. the documentation of when bias occurs and the development of theory on why this bias might occur. Specific goals would include the documentation of heuristic use. which is a formidable requirement. Research design becomes paramount. The goal in this case would be to show that in various real estate decisions. It can also be done through the use of domain-specific experts in the experimental design stage of research. research into As a first step in theory development. This may be a laudable goal. Finally. the testing of data relevancy by experts and comparisons between novice and experts. If one wants to determine if experts use. The lack of large numbers of .likely to dominate. the definition of real estate as a heuristics discipline can be integrated into Shanteau's Theory of Expert Competence to formulate when real estate-specific heuristic might exist. This has been shown to be the case in other disciplines. This will allow for consideration of when. then additional theory of the task environment may be necessary. Why is this the case? Heuristics only exist and become preconscious when one gets positive feedback. A second choice is available and has been employed to some extent by several real estate researchers including Diaz. Additional goals and objectives In addition to the mentioned need for theory.

etc. the effect of heuristics on the negotiation process is a viable research venue. Lender versus equity underwriting can also serve as a basis for investigation. to include other areas of real estate decision making. Research should test Evans' and others' hypothesis that heuristics are functional with a framework provided by Shanteau adapted to the real estate decision making environment. If experts are affected by heuristic bias as opposed to just novice participants in a controlled experiment there would be a broader acceptance of decision making research. This allows for access to experts and better experimental design. Cognitive process simplification can be based on data. there are numerous avenues of study. External validity must become important in addition to the testing of theories of heuristic use. It. Experimental design is critical and differs substantially from most forms of analysis used in real estate and finance. test theory on novices and experts and show how heuristics might affect real estate decision making. Develop theory much as consumer behaviorists have done. Differences between lender types and lender institutions is a viable research option. is a cognitive data reduction process. This will tie theory to practice and relevance. The study of experts is critical for acceptance of heuristic use and potential bias in the general real estate literature. Since real estate is generally purchased through a negotiated process. in essence. If one considers that behaviorists in consumer research can convincingly argue that ad placement affects retention. Finally. . presentation effects. The goals are simple. the difference between novice and expert home purchasers. real estate research could provide the means to advance past the psychological research by empirically testing a possible mitigating effect when expertise is developed and by testing if. Notes 1. are all open to investigation.JPIF 17. A heuristic is a cognitive short-cut that allows for a reduction in the amount of information processed. The interaction between realtors and clients. heuristic bias exists within domains of expertise as opposed to potentially misidentifying expertise and bias. This will be of substantial interest both within the real estate field and within the decision making literature. as well as declarative and procedural knowledge. in fact. At a theory testing level. Commercial real estate lending is an area of interest as the complexity of large commercial transactions requires judgment and decision making skills. theoretical and empirical research should be expanded from the valuation area which remains an important base of study. In addition. There are substantial other areas for research with experimental design and data acquisition being the major obstacles to productive research. With regard to residential real estate.4 350 experts within domains of expertise is apparent. then options for research in real estate seem almost limitless. this is potentially a rich area for investigation. Real estate and business researchers in general have a better opportunity to move theory forward because their fields of interest are applied.

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