Mental Models in Purchasing a New Home

I admit, watching and discussing shows about houses is one of my guilty pleasures. I love the HGTV channel. Even though we don’t have cable, we watch some of the shows through Netflix and Hulu Plus. The designs of the homes, the architectural styles, the furnishings, the deal negotiations – it’s all really cool to me. In another life I probably could have been a residential architect – that might be a fun job!

One of the things Mrs. Mase and I laugh about when we watch these shows is the hilarity of the couples that are looking for a prospective home. The irrationality is sometimes amazing. People get so wrapped up in their desire for the “perfect house” that they pass up otherwise good opportunities and go for homes that really aren’t right for them, one way or another.

I’ve been slowly working my way through Charlie Munger’s Poor Charlie’s Almanac, which is compilation of speeches and various pieces of wisdom from the famous Berkshire Hathaway chairman. One of the big takeaways from the book is the idea that all complex problems have complex causes formed by a variety of variables, and that the best rational way to view these problems is through the lens of mental models.

A mental model is a principle or a framework for viewing a situation. Munger says that there is a latticework of about 100 main mental models that intertwine with each other, spanning the disciplines of biology, psychology, physics, engineering, math, etc.

Sometimes when I watch these house shows, I can’t help but think about how some of these models apply to people’s psyche as they go through the home-buying process. As someone who’s gone through the process myself, I can more clearly see why it’s so easy to make irrational home buying decisions, now that me and my wife are on the other side of it. Here are some examples of what I’m talking about:

“We should jump on this house because someone else will take it.”

This is the concept of scarcity. Couples love to egg each other on when they see a beautiful house, say, at an open house, and see other people eyeing the property as well. The thing is, scarcity is completely perceived. What people who say this should do is first look at the amount of time the home has been on the market. If it hasn’t been bought for over 60 days, well guess what – people haven’t bought it yet so what’s the rush?

“This house is perfect. We shouldn’t put in an offer though because it’s just the first one we’ve seen. Let’s go look at more houses.”

I admit I’m prey to this logical fallacy myself. Here is the mental model of Reactance, which is in this context is the motivational reaction to an offer for a perfect home due to a perceived lack of control and choice. Even if a home is the right fit right off the bat and is priced well, people often want to keep looking simply for the fact that they know there could be other possibilities out there; therefore they do not want to limit their potential choices even though they have no knowledge of what they will actually be once they start looking.

“The carpet is ugly and this house has wallpaper. What a terrible house.”

Of course, carpet can be replaced, and so can wallpaper. However, it is the mere sight of them existing in the house that turns people off to buying it. This is a great example of the horns effect (opposite of the halo effect). This states that because something is not desired, everything in close association with that something is also not desired. It is a negative disposition by association.

Although a house may be structurally sound, well built, and have an excellent curb appeal, an ugly interior can kill the deal for a prospective buyer. This is simply because people, especially those who are looking for modern and new homes, will have a strong negative association with the house because of the things undesirable things they noticed.

Old furniture in a house with ugly carpet and wallpaper signals, “this house is old and out of date”, even though it is really just those items that need replacement. After a couple leaves and goes home to think about the homes they saw, they will likely refer to this house as “the one with the ugly carpets”.

“We’re having our first baby. We need at least 2000 square feet for our growing family.”

This is an example of social proof, and is probably one of the more common home-purchasing biases in American culture today. Everybody thinks they need significantly more space than they currently have because a baby is on the way. Now, if you’re a family of four living in 700 square feet and you’ve got another kid on the way, then this is understandable because your living space naturally feels cramped already.

However, a two person family that is about to become a three person family does not need to upgrade from a 1000 square foot home to a 2000 square foot home. It might be a nice upgrade, if it is affordable, but it is not a need.

By upgrading to a larger dwelling though, John and Jane Homebuyer are subconsciously looking to increase their social prestige. To them, it is a symbol of a greater level of success than their peers who do not have houses as large. It is also the fallacy that, because there is more space for little junior to crawl around in, they are therefore better parents because they provided that extra space.

There are even more mental models that come into play that I did not mention. In all, there are a lot of psychological and social forces at work that ultimately guide decision making, especially home buying.

A good course of action, I have found, is to keep a detailed (though necessarily subjective) list with all of the things you want in your next home. Then look for homes that fit all or most of those characteristics. Rank each characteristic with a certain amount of weight relative to a baseline.

This is a technique used in engineering called a Pugh chart – it helps compare alternatives to a baseline given a set amount of characteristics or traits. Each trait is weighted according to how much a person values that trait over another. For example, I might value having hardwood floors over having a large kitchen with an island. A home with hardwood floors and no large kitchen might therefore rank higher in my list than one with the opposite attributes.

Anyway, everyone has his or her own preferences. However, I think it is wise to look at big decisions like this as rationally as possible. Also, be honest with yourself – if you know you’re really not going to be happy unless a new home has X feature or characteristic, then don’t settle until you find that home at a fair price.