I just read an interesting chapter from Tim Smith’s book, "Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures." It’s Chapter 5: Psychological Influences on Price Sensitivity.

The chapter covers a number of pricing phenomenons, such as why prices ending in .99 tend to convey a discount and why whole prices ending in 0 tend to speak more to quality. It’s for this reason that art work is typically priced using simple round numbers.

But one of most interesting theories from the chapter is that of Prospect Theory. Not only because of its impact on pricing strategies, but because, I think, it also applies to the real estate development business.

Prospect Theory essentially describes the way people make decisions in the face of uncertainty. The two big takeaways for me are (1) that potential losses carry more weight than potential gains and (2) that both losses and gains experience diminishing returns.

What this effectively means is that people, when faced with risk, tend to focus more on the negatives, and the potential losses, than on the positives. This means that the gains just can’t match the losses, they have to be significantly greater if you’re going to inspire action (a purchasing decision, a change in behaviour, or whatever).

The second point basically means that these gains and losses become muted after a certain point. If you hit someone with enough of either, eventually they reach a point where they become desensitized in a way. Each additional amount of gain or loss produces less and less impact.

Besides the obvious point of making sure that your product or service results in lots of gain for your customer, there are a couple of other things you can do to respond to this theory.

The first is to “bundle losses” and “unbundle gains”. In other words, hit people with all the losses at once and then spread out the gains. What this does is maximize the psychological perception of gains and minimize the perception of losses because, remember, after a while people start to discount the losses.

The other thing you can do is transfer losses, which is often just the cost itself, from direct to indirect. Big box stores, as an example, are great at this. They offer low prices (a direct cost) in exchange for greater indirect costs: higher transportation costs to the user, greater environmental impact, and so on. Studies show that people feel direct costs much more than indirect costs.

There are a bunch of things you can do based on this theory, but again, one of the most fascinating things for me was how it also applies to the real estate industry. There’s a well known acronym in the industry called NIMBY. It stands for Not In My Back Yard, and it’s used pejoratively to refer to people who oppose development in their community.

However, if you look at NIMBY’ism through the lens of Prospect Theory, you realize that it’s almost an innate human reaction. Development and construction is disruptive and the end result is change in somebody’s community. And I suspect that most residents view it as a risky and uncertain situation. Therefore, it’s no wonder that they’re first reaction is opposition. They’re weighing the potential losses more than the potential gains.

So maybe we developers just need to apply a little Prospect Theory. We need to get better at producing and communicating gains.

I was reading Novae Res Urbis this morning and they had a piece on the 3 tower Mirvish + Gehry proposal in Toronto’s Entertainment District. It was talking about David Mirvish’s “sales pitch” to the Empire Club of Canada this week, an attempt to help overcome the criticism around the design, height and overall density of the project. The article ended by saying that the developer will be appealing to the OMB this January.

I know that I’m probably biased in this matter, but I fail to understand the concern around height and density - particularly since the site is 2 blocks from a subway station. Why are we - citizens and policy makers - so obsessed with building height? Good architecture and urban design involves a lot more than the number of floors. Can we not have more sophisticated conversations about built form rather than fixating ourselves on building height?

Secondly, whenever a building gets proposed in Toronto that attempts to, literally, step outside of the box it gets pegged as controversial. Take, for example, the

This past Wednesday the Globe & Mail newspaper announced that they signed a 15-year lease to be the lead tenant in a new office tower now under construction at 351 King Street East (just west of Parliament Street). This means that the newspaper will be leaving its current digs on the west side of downtown at Front & Spadina.

I have to admit that I was pretty excited when I read the news. The design looks incredibly promising and, as some of you might know, I’m bullish on the east side of downtown.

One of my favourite areas of the city is the Distillery District. But today it still feels very much like an island. And it’s because the city hasn’t really caught up to it. It’s a destination.

However, between the West Don Lands and major office projects such as this one (it’s 500,000 sf), I think the east side of downtown is about to hit its stride.