Tom Gardner and Morgan Housel (The Motley Fool) recently published a LinkedIn article called, Why Does Pessimism Sound So Smart? (Especially When Things Are So Good.)

Here is the gist of it:

If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize.

Part of the reason for this is that we, as humans, respond more strongly to losses:

There’s clearly more at stake with pessimism. Daniel Kahneman won the Nobel Prize for showing that people respond more strongly to loss than gain. It’s an evolutionary shield: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce,” Kahneman once wrote.

The behavioural economic theory being referred to above is called Prospect Theory. I wrote about this back in the fall of 2013 and made the argument that Prospect Theory might explain why NIMBYISM is so common in city building. 

Change to our communities is perceived as risky. And in the face of these uncertain situations, we tend to place more emphasis on the potential losses (traffic, congestion, shadowing, and so on) rather than the potential gains (increased vibrancy, improved streetscape, creation of more housing, and so on). It’s human nature.

Having said all this, I show up here every day and try to make this blog a positive place on the internet. Sure, I make suggestions about things I think we should do, but I generally focus on them as opportunities. Hopefully that comes through, because I’m a big fan of optimism.

Last week I called somebody a NIMBY. And though I probably shouldn’t have, it stems from the fact that I make a concerted effort to be the exact opposite: a YIMBY (Yes In My Back Yard, as opposed to Not In My Back Yard).

I appreciate that change can be difficult for a lot of people. In fact, behavioral economic theory (specifically Prospect Theory) suggests that when people are faced with probabilistic alternatives involving risk, they tend to put more weight on the potential losses. This means that the potential benefits have to be, not just marginally better, but hugely more beneficial before people will make the change.

Because I know I’m equipped with this bias, I try and constantly remind myself that change and motion are good and that oftentimes the potential losses or negatives aren’t going to be as bad as I might initially think.

However, I also have a counter acting bias. I recently did a personality assessment (called the

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.