Not as good as intented: Home buyers for whom the purchase of the home is a main reason for moving systematically overestimate the long-term satisfaction gain of living in their dwelling

Does the Dream of Home Ownership Rest Upon Biased Beliefs? A Test Based on Predicted and Realized Life Satisfaction. Reto Odermatt & Alois Stutzer. Journal of Happiness Studies, September 14 2022. https://rd.springer.com/article/10.1007/s10902-022-00571-w

Abstract: The belief that home ownership makes people happy is probably one of the most widespread intuitive theories of happiness. However, whether it is accurate is an open question. Based on individual panel data, we explore whether home buyers systematically overestimate the life satisfaction associated with moving to their privately owned property. To identify potential prediction errors, we compare people’s forecasts of their life satisfaction in 5 years’ time with their current realizations. We find that home buyers for whom the purchase of the home is a main reason for moving, on average, systematically overestimate the long-term satisfaction gain of living in their dwelling. The misprediction therein is driven by home buyers who follow extrinsically-oriented life goals, highlighting biased beliefs regarding own preferences as a relevant mechanism in the prediction errors.

Conclusions

This study explores whether home owners systematically overestimate the well-being derived from living in a privately owned house. For this, we jointly analyze people’s expectations regarding their future satisfaction and their actually experienced satisfaction with life later on. This allows us to study whether home buyers, on average, hold accurate beliefs—a cornerstone of standard economics—when facing the house purchase.

The results offer evidence in line with our hypothesis that home buyers systematically overestimate their future life satisfaction just before as well as just after having relocated to their acquired dwelling. This provides support for the speculation that home buyers potentially rely on biased beliefs regarding the long-term benefits of home ownership in the decision-making process, at least if they consider the purchase of property as a main reason for moving. The finding backs the general notion that people overestimate the satisfaction consequences of certain life achievements. From this observation, it is, however, difficult to assess whether the prediction errors are primarily driven by biased beliefs people hold, for example, about their individual preferences. We therefore investigate the heterogeneity in prediction errors across groups with different life goals, reflecting differences in underlying beliefs about preferences or, more generally, what goals should be pursued in life to satisfy needs. Specifically, we study differences regarding the preferability of extrinsic versus intrinsic life goals. We find that home buyers with extrinsically oriented life goals compared to those with intrinsically oriented ones tend to make bigger prediction errors. This result provides evidence for biased beliefs and demonstrates the crucial role of the heterogeneity in people’s beliefs regarding the well-being consequences of certain decisions.

Our study questions the ancillary role that is ascribed to beliefs in most economic applications. If people predict the utility from decision outcomes based on beliefs about their preferences, individuals’ choices would not reveal true preferences, but rather beliefs regarding preferences. Our findings provide evidence in this direction by showing that the accuracy of people’s predictions depends on their belief system. A further investigation of the role of beliefs is a promising topic for future research, as it affects fundamental theoretical assumptions of the economic approach. For example, one could study to what extent beliefs about the utility derived from goods or experiences are influenced by factors such as culture and formal institutions, advertising or, on the individual level, parenting and education. Such endogeneity of people’s beliefs complements what has up to now been discussed under the notion of endogenous preferences in economics [see, e.g., (Bowles, 1998)].

Another perspective on the role of beliefs in economics is that the formation of beliefs plays a fundamental role in the process when people are trying to achieve short- and long-term goals in life. In this process, accuracy might not be the only objective, as beliefs also serve the important purpose of motivating people so that they persevere in applying effort to achieve goals (see (Bénabou & Tirole, 2016) or (Epley & Gilovich, 2016) on motivated beliefs). This instrumental aspect emphasizing the enhancement of self-efficacy is complemented by other motives, as people might want to share beliefs in accordance with their peer group or their self-image. Other reasons for belief distortions are discussed by Brunnermeier and Parker (2005), who argue that a small bias in subjective beliefs can lead to first-order gains due to increased anticipatory utility (see also (Loewenstein & Molnar, 2018) for a review on belief-based utility). Accordingly, people might (implicitly) trade-off belief-based utility in the short-term for accuracy in the long-term. Whether this trade-off is sub-optimal, reducing individuals’ welfare overall, is difficult to judge however, also within our framework. The less people value and consume the dream of home ownership per se beforehand, the more likely will mispredicted utility be related to a welfare loss due to inaccurate beliefs.

From a general perspective, it is crucial that economic analysis gains a better understanding of the role of individuals’ beliefs as a driver of mispredicted utility and potentially sub-optimal behavior. Such a research enterprise also involves the forces and actors that influence people’s (life) goals and thus their beliefs. If these actors pursue private interests, influence might translate into attempts at manipulation. It is thus important that the conditions under which biased beliefs evolve and influence decision-making processes are identified, an account that economics has not offered so far.