Americans believe in home ownership. When asked what is the “best” investment, responders to a Gallup survey this week answered real estate. But the evidence suggests otherwise.
From CNNmoney.com (Matthews, 18 April 2014):
When adjusted for inflation, the average house has appreciated little since 1987. The picture looks a lot different for the other investments Gallup asked about it in its polls. The S&P 500, for instance, has produced an inflation-adjusted annual return of 6.32% since 1929, while investing in government debt would have returned roughly half that figure. Gold, interestingly enough, has performed pretty well on an inflation-adjusted basis, averaging a 4.12% return per year since the end of the Bretton-Woods monetary order in 1971.
One of the interesting outcomes of the survey is that, as investors, we are more likely to say that the best investment choices are best because we chose them. And many of us own homes. Ergo…real estate is best. Not great logic, but it does demonstrate the behavioral bias called the endowment effect.
In a nutshell, the endowment effect says that we deem items to be more valuable just because we own them, and not necessarily because they carry any particular intrinsic value in themselves. This effect is captured in a 2008 Economist article that quotes Ayn Rand.
From the article:
“I AM the most offensively possessive man on earth. I do something to things. Let me pick up an ashtray from a dime-store counter, pay for it and put it in my pocket—and it becomes a special kind of ashtray, unlike any on earth, because it's mine.” What was true of Wynand, one of the main characters in Ayn Rand's novel “The Fountainhead”, may be true of everyone. From basketball tickets to waterfowl-hunting rights to classic albums, once someone owns something, he places a higher value on it than he did when he acquired it—an observation first called “the endowment effect” about 28 years ago by Richard Thaler, who these days works at the University of Chicago.
Where do you see evidence of a behavioral bias in how you or others value investments?