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Lessons from other disciplines and implications for real estate

Department of Finance and Economics, Mississippi State University, Mississippi, USA
Keywords Heuristics, Real estate, Operational research, Influence Abstract Behavioral research is an accepted research paradigm in business disciplines outside of finance including management, marketing and accounting. This paper looks at these disciplines and proposes goals for increasing acceptance of this form of research in real estate. Primary goals include investigation of actual heuristic use, concentration on expert decision makers, either as a group or in comparison to novices, incorporation of additional theory advocating functional heuristics, incorporation of real estate specific theory and identifying both theoretically and empirically when, why and how heuristic use may bias the decision process.

Behavioral research into heuristics and bias as an academic pursuit

William Hardin III

ACADEMIC PAPERS

Academic papers: Behavioral research into heuristics 333

Introduction Finance and real estate researchers have been late in the acceptance, or at least partial acceptance, of behavioral theory as a paradigm for the study of decision making. This is in contrast with other areas of business specialization including marketing, accounting and management which have a tradition of using cognitive behavioral theory to both describe the decision process and prescribe possible methods for improving the decision making environment. This paper presents a broad overview of the general theoretical concepts and prior empirical research concerning decision making and heuristic[1] use in real estate and other business disciplines and advocates the development of a theoretical foundation for decision making within a real estate framework. The first section addresses the theory of human information processing and builds a foundation for real estate as an area for research. The second section reviews major non-real estate theoretical concepts and heuristics. Empirical investigations are presented in section three while the final section reviews real estate studies and outlines possible areas suitable for real estate-specific theory development and empirical investigation.

Journal of Property Investment & Finance, Vol. 17 No. 4, 1999, pp. 333-352. # MCB University Press, 1463-578X

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Human information processing, intelligence, expertise and real estate The theoretical foundation used in most studies of the decision making is derived from Simon (1957, 1978) and Newell and Simon (1972). Simon (1957) postulates that decisions are made within a subset of all potential solutions. Limitations in the use and review of all potential solutions is a rational behavior as other factors, including search cost and data evaluation, impact a specific individual's utility. Newell and Simon (1972) and Simon (1978) expand and refine Simon's initial work by emphasizing individuals' cognitive limitations and by developing a theory of human information processing that integrates limitations in short-term memory with the decision making process. Further theory developed by Evans (1989), Baron (1985) and Shanteau (1992) emphasizes that the use of schemas[2] or heuristics is fundamentally a rational response to expanding levels of information. Newell and Simon's (1972) and Simon's (1978) extensive foundation of human information-processing theory can be presented in simplified terms. An individual interprets a task (decision to be made) and tries to formulate it into a known, structured problem space[3]. The selection of a problem space, or schema, is an interactive process composed of information processing, task environment comprehension, and problem space definition. Interaction is facilitated by information-processing heuristics at the task environment[4] interpretation stage and the problem space generation stage of the decision process. The use of heuristics reduces the number of alternatives available for problem resolution. Simon's fundamental argument is:
problem solving behavior is produced by a small set of elementary information processes, organized into strategies or programs (Simon, 1978, p. 279).

When properly applied, information-processing heuristics reduce search time by providing for proper task definition and problem space generation. The ability to quickly access and effectively process data is the essence of domainspecific expertise. In fact, Newell and Simon (1981) define intelligence based on an individual's capacity to use simplifying heuristics. There is no limit to the amount of information that is available for search, or in the number of potential search patterns, but in order to function in an ill-structured environment humans must be able to determine what data are relevant and what relationships are plausible. The decision maker must interpret the task environment and generate a problem space that allows for the solution of the task. Building on the Newell and Simon framework, Evans (1989) postulates that experience and training will allow for better task recognition and greater development of problem spaces. Heuristics are preconscious allowing for the rapid acquisition and implementation of data search procedures when faced with familiar tasks. When faced with a familiar task, the decision maker uses a preconscious, pre-developed schema that determines the task and the production rules available to resolve the problem. The schema is domain

specific and includes related ``declarative and procedural knowledge.'' An Academic papers: expert has domain-specific knowledge and a procedure, or procedures, for Behavioral incorporating that knowledge into the decision making process. Baron (1985) research into argues that the selection of one schema may result in the selection of one set of heuristics relevant information while the use of another schema may result in a different set of relevant information. Each schema contains knowledge from a particular 335 domain that serves as a guide to relevant data selection. In summary, human information processing theory indicates that humans obtain domain-specific schema that lead to optimal decisions within the framework of their domains of expertise. Bias may occur because of the misapplication of schema that control processing heuristics or underdeveloped domain knowledge. Therefore, the development of additional theory on when schema misapplication may occur is necessary and is partially provided by Shanteau (1992) with the prerequisite to the misapplication of schema, of course, being sufficient domain expertise for schema development. Shanteau's Theory of Expert Competence includes five specific factors affecting an expert's competence to address sources of potential bias found in empirical research on decision making presented by both behavioral and cognitive researchers. The model's first factor is domain knowledge including textbook knowledge plus experience gained by working in a real world problem solving environment. The second factor is psychological traits and includes self-confidence, responsibility, and an ability to adapt, as traits required of an expert. The third factor is cognitive skill and involves the expert's ability to determine relevant data cues from complex and stressful external environments. The fourth factor is called decision strategies; it includes simplification strategies for data acquisition and the use of preconscious decision procedures or heuristics. These initial four factors require the decision maker to have sufficient knowledge and experience to develop data acquisition heuristics that work. The fifth and final factor affecting expertise is task characteristic. Shanteau postulates that in more dynamic situations actual task interpretation and presentation are difficult. For experts to show good performance, the task must be repetitive, objective, decomposable, allow for substantial feedback, have agreed upon stimuli, and have predictable problem parameters. Even if agreement is reached on the actual task to be solved, the characteristics of the task environment will impact problem resolution. Bias in decision making may occur through an inaccurate perception of the task or the incorporation of poorly developed schema. When humans are asked to solve tasks that are inherently difficult to master due to poor feedback, uncertainty with regard to the variability of inputs and outputs, uncertain stimuli, and unpredictable problem parameters, heuristic use is likely to lead to sub-optimal decisions. In the context of real estate research, Shanteau's theory provides two important insights. The first is a requirement for domain-specific expertise. In investigating human information processing in a real estate context, special attention is required when specifying expertise because without

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expertise at some level, the existence and effect of heuristic use can only be inferred as a general decision making condition. Heuristic bias would occur because domain knowledge is insufficient and general informationprocessing heuristics are inadequate to address the task. Consequently, an over-reliance on the use of na ve or novice study participants may render real estate based research simply replications of studies showing that bias is greatest in general cases with limited domain-specific expertise. Second, the actual task definition is critical. Because effective heuristic development requires a task to be repetitive, objective and decomposable with substantial feedback, researchers must control the research environment to adequately test for heuristic use and potential bias. Real estate decision making takes place in an ill-structured environment with uncertain stimuli, limited feedback and numerous overlapping domains of expertise a dynamic research environment requiring substantial due diligence by researchers. Task definition and the researcher's definition of optimal may lead to the appearance of heuristic bias when, in fact, none exists. For example, an attempt by appraisers to cognitively confirm a sales price may be a functional[5] heuristic even if it does not meet the criteria of normative appraisal models. Real estate decision making provides an opportunity to substantially expand empirical research provided this research conforms with a general theory of functional heuristics where sub-optimization may occur due to limitations in task definition, actual expertise or environment. Heuristics and bias The focus of much of the general information-processing literature has been on situations where the use of heuristics may bias the decision process. The three heuristics identified in the early 1970s by Tversky and Kahneman the representative heuristic, the availability heuristic, and the anchoring and adjustment heuristic along with the positivity heuristic defined by Evans (1989) have been the center of much research. The observance and definition of additional heuristics has also occurred, but these four heuristics remain the most studied and most acknowledged within the literature. They are identified below because an understanding of these heuristics is essential for evaluating their applicability in a real estate context. Tversky and Kahneman (1971, 1972) observed and defined the representative heuristic. They found that humans interpret a sample to be more representative of the parent population than it actually is. Subjective assessment of probability may be at odds with actual probability. Their definition of the representative heuristic allows that bias occurs as the inability to properly assess the probability of an event over different sample sizes and populations affects decisions. In a thesis on judgment, Tversky and Kahneman (1974) provide an example of the representative heuristic and how it might cause bias. A description of an individual was developed. The researchers then asked respondents to determine to which profession the individual belonged. The description of the individual is below:

common response. Such a response, however, was at odds with the base-rate frequency[6] of librarians when contrasted with the general population and other professions. People can be insensitive to sample size, prior probability of outcomes, and misconceptions of chance. The availability heuristic (Tversky and Kahneman, 1973) states that individuals assess probabilities based on their familiarity with a certain task, idea, or environment. Humans attempt to frame a decision based on prior situations confronted and successfully negotiated. Bias occurs because once a task or situation has been perceived in a certain way such a perception is difficult to change. Furthermore, bias occurs because of data retrievability, salience, and illusory correlation. The availability heuristic restricts the formation of more effective heuristics unless feedback demonstrates that bias has been created. The anchoring and adjustment heuristic is the last major heuristic defined by Tversky and Kahneman (1974). This heuristic simply means that individuals start at one place in a decision matrix and adjust from that initial point. Individuals try to get ``close'' and then make adjusts from an initial point by obtaining and using additional information. Bias occurs when the initial anchor is incorrect, insufficient adjustment is made, or there is an overly optimistic estimation of conjunctive probability. Much of the literature on the decision making process concerns the anchoring and adjustment heuristic as it is the most easily operationalized. Evans (1989) uses the work of Tversky and Kahneman and others as a foundation for his synthesis of heuristics and bias and definition of a positivity bias. Evans' arguments are based on an extension of the concept of a confirmation heuristic meaning that humans seek data that is fundamentally consistent with existing beliefs, theories and cognition. Bias occurs when data that should be deemed relevant is not because of a preconscious search for positive feedback. Evans, however, argues that the concept of confirmation bias is not correct and that confirmation bias is a function of ``cognitive failure'' in the human information-processing system developed by Simon. Specifically, Evans proposes a positivity bias and states:
Positivity bias is assumed to arise from the preconscious heuristic processes which determine the locus of the subjects' attention (Evans, 1989, p. 43).

Academic papers: Behavioral research into The authors then listed a number of professions and asked the respondents to determine the profession to which Steve belonged. Librarian was the most heuristics
Steve is very shy and withdrawn, invariably helpful, but with little interest in people or the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.

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Humans are looking for ways of confirming their individual interpretations of the world via their perception of the task environment and determination of the problem space. The four foundation heuristics have provided a framework for behavioral research within a real estate framework, but only as an extension of the general use of heuristics. The heuristics represent a call for descriptive research that

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will allow for the actual confirmation of the existence of systematic data acquisition. There is a need to describe the decision process without accessing a correct solution. If expertise requires systematic data search then a first step in the research should include confirmation of some level of expertise by showing that experts actually use systematic data retrieval. At a second level, the existence of sub-optimal results then can be addressed. The goal of this second level would be the determination of what tasks and environments create heuristic bias. The definition or replication of bias caused by heuristic use in non-domain-specific areas of interest is no longer enough unless theory development is included or direct real world application is possible. Empirical research Research on the business decision making process has included actual versus normative decision making, the potential of information-processing heuristics to cause bias, and differences in data processing between novices and experts. A brief review of normative lending and real estate models and an analysis of heuristics, bias, novices, and experts from other business disciplines are presented. The research presented is by all means not all inclusive, but does provide exposure to the diversity of areas of interest and the sophistication of the actual research design process. The breadth of the subjects that have been investigated empirically shows that theory, practice and real world applications must all be addressed. Normative and descriptive modeling have been investigated. Theory has been empirically tested requiring theory refinement and experimental design changes. Specific heuristics have been researched, as have data acquisition strategies. The noted research is helpful in design evaluation for real estate research and allows real estate researchers a feel for the acceptance level of heuristic study in other fields; the goal being theory testing with some applicability to practical business decision making. Normative decision models Beaulieu (1994) studied the normative Five Cs of Credit Model[7] and lenders' actual use of this model in making a loan decision. The investigation was specifically concerned with the use of character and accounting data as components of the loan decision. Participants included students in a commercial lending training school who were given a general loan scenario[8] and then given 26 facts about the company providing information for character analysis and credit analysis. After being presented these facts, the respondents either approved or declined the loan, and were asked to measure their confidence in the decision made and the probability of loan repayment. The facts where manipulated to evidence positive, neutral, or negative character and positive, neutral, or negative accounting performance (a 3X3 design). Results indicated that experienced lenders weighted the negative accounting more heavily than lending novices. When confronted by a scenario with negative accounting performance, none of the experienced lenders approved

the loan even with positive character attributes. Novices facing the same Academic papers: situation approved the loan 31 percent of the time. The experienced lenders Behavioral more heavily weighted the accounting data and were less concerned with research into character in all the scenarios presented. Unfortunately, since actual company heuristics financial data were not presented to the respondents, there was no ranking of data that could be used to determine relevant data cues by lender group. The 339 study, however, provides evidence that the normative Five Cs of Credit Model taught in business schools and in bank training programs is not always applied. In an investigation of the decision making processes used by appraisers when compared to the normative model prescribed by theory and promulgated by the Appraisal Institute and government regulation in the United States, Diaz (1990a) found substantial differences. Diaz used a single factor (familiarity high, low) design to determine if geographic familiarity impacts the data acquisition strategy of expert appraisers. Diaz found that experienced appraisers dealing with both familiar and unfamiliar demographic areas deviated from prescribed appraisal practices. He was also able to show that the pattern of cue utilization is similar in both appraisal situations. This indicates that appraisers use production rules that deviate from the prescribed model, but are functional in the actual determination of an appraised value. Beaulieu and Diaz provide evidence that lenders and appraisers, two major participants in the real estate industry, deviate from prescribed decision models. This is further support for Kanaan's (1993) commentary on the need to redefine normative models and to determine what actually occurs when individuals make decisions. What is evident from these studies is that the human decision process is often simplified as data are determined to be either relevant or irrelevant within the context, or schema, of the decision environment. The ability to describe the decision process sufficiently will be essential for the comparison of normative models and actual decision making processes especially if one accepts that heuristic use is functional. Within the real estate research arena, the decision making process remains underinvestigated. Consumer behavior research There is a large volume of research in the consumer behavior literature on heuristics, bias, preconscious information processing, and schema development. A primary reference for this literature is the Handbook of Consumer Behavior (Bettman et al., 1991) as well as the Journal of Consumer Research. In a general context, most studies support the theoretical foundation found in the psychology literature. Within the context of this paper, consumer choice and data acquisition strategies have been shown to be subject to heuristic bias. A sample of relevant, well-designed empirical research is presented below. Folkes (1988) studied the availability heuristic in a consumer setting using four separate experiments. In Study 1, instances of product success and failure

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(the product used in the case was a rust-stain removal product) were presented to 46 undergraduate students in combination with more or less distinctive names. Three conditions were studied failing products with non-distinctive names, failing products with distinctive names, and half-failing and halfsucceeding products with brand names. In estimating failure rates, the distinctively named products were judged to have a greater probability of failure. In Study 2, Folkes observed the amount of time respondents were attentive to the products in the aforementioned scenario and found that the respondents paid more attention to the ineffective outcomes with distinctive brand names. In Study 3, Folkes investigated students' estimation of the failure rate of an escalator in a major campus building. Due to building design, it was possible to segment the sample into students that used a combination of escalators and stairs or an elevator and students that only used an escalator (students could access the building's sixth floor using a combination of escalators and stairs or an elevator while the first four floors were served by an escalator system). Students were asked to estimate the percentage of time the escalator was broken. The students that were dependent on the escalator system estimated that the escalator was broken 54 percent of the time while the other student group estimated a failure rate of 31 percent. The distinctive nature of walking up a broken escalator was thought to have increased the saliency of the escalator failure. In the first part of Study 4, 97 students completed a questionnaire to test whether instances of failure were more easily recalled than instances of success. Recall of successful instances was correlated with frequency of use while recall of instances of failure was based on the distinctive source of the failure. In the second part of Study 4, the respondents indicated the likelihood of instances of success or failure. Likelihood estimates were not correlated with the recall of successful instances, but were correlated with the recall of instances of failure. In all instances studied, Folkes found that there was bias in judgment caused by the availability heuristic: individuals overestimated failure rates after exposure to distinctive situations. Increased saliency, caused by distinctiveness, is likely to influence the perception of relevant data in a decision situation. The decision maker may create a schema to address distinctive features of the task while relevant data are not accessed, leading to a biased result. Sujan (1985) tested how prior knowledge affects the evaluation process. The piecemeal (attribute by attribute) approach to information processing was compared to categorical information processing where an item is grouped by class in a schema-driven process. Using a complex verbal protocol design with cameras as the basic stimuli, Sujan found that both experts and novices attempted to use a categorical strategy, but that experts were better at understanding and evaluating deviations from the prescribed category. Experts are able to evaluate deviations and better assess categorical variations. Sujan finds the experiment's results:

information search. Using sewing machines as a product class, Brucks analyzed the way that novices and experts search for data. An interactive process was created that permitted the study participants to ask for data and have the data presented via a computer allowing Brucks to trace data cue selection. Brucks' primary finding was that when humans are faced with complex decisions:
objective knowledge was associated with seeking less information about inappropriate alternatives and with using a pattern of search that exhibits a greater degree of variance in the number of questions asked about the considered alternatives (indicating greater search efficiency) (Brucks, 1985, p. 12).

Academic papers: Behavioral research into Brucks (1985) completed a study of the effects of product knowledge on heuristics
consistent with a general schema perspective that suggests that schema-consistent information can be chunked into large perceptual units and processed more easily (Sujan, 1985, p. 45).

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This finding supports the postulate that simplification heuristics are indicative of expertise. Expertise will make individuals more effective at data acquisition, but such efficiency will only be evident when situations warrant. In less complicated decisions, there is limited need for simplification heuristics so they will not be evident. Also, domain-specific knowledge is a prerequisite. In a study of preconscious data acquisition and recognition, Janiszewski (1988) found that attitude formation occurs preconsciously. Janiszewski used evaluation of a print ad to study if the evaluation of an ad could change without a change in ad recognition. Using contralateral conduction and the physiological premise that the left and right hemispheres of the brain process differing forms of information, Janiszewski was able to show that evaluation can take place without recognition. This lends support to Simon and Newell's (1972), Simon's (1978) and Evans' (1989) hypotheses that information processing has a preconscious component. Information is processed preconsciously before humans are conscious of the presence of information. In real estate, do purchasers or investors develop preconscious schema based on visual stimulation? Consumer behavior research, as evidenced by the review of only a few of the major studies available from the literature, provides support for the information-processing capabilities proposed in the psychology literature. Consumers are influenced by heuristics that can bias, use schema to simplify the information search process, simplify data search within domain-specific knowledge, and process information on a preconscious basis. Expertise is manifested by systematic data search and data retrieval. So, within the realm of real estate, can one design studies of stigma, the influence of ``view'' or ``curb appeal,'' or any other market driven effect? Can one test for the influence of race, nationality or gender using a cognitive approach? Can one simply show systematic data acquisition strategies? Do real estate experts recognize anomalies in value or price?

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Accounting research Like consumer researchers, accounting academics have embraced cognitive, human behavioral research. Several of the numerous noteworthy empirical studies from this literature are summarized below as is Smith and Kida's (1991) review of heuristic research in accounting. Heuristic bias is a common research topic as judgment is generally required within the accounting field. The best accountants are able to look past the numbers, the data, and generate information. In a study of the anchoring and adjustment heuristic and the potential for bias in an accounting setting, Kinney and Uecker (1982) found that the anchoring and adjustment heuristic can cause bias in at least two situations: compliance sampling and completing financial analysis. In two tests of senior auditors from the then Big Eight accounting firms, the authors found that financial presentation influenced the level of variability expected in a firm's performance and that compliance sampling was influenced by the method of sampling error estimation. Auditors may be susceptible to historical data trends when interpreting current unaudited results. The key is at what level of variability in present versus past performance should additional investigation be required when assessing a specific income or balance sheet account. In the sampling case, results showed that senior auditors did not properly assess the representativeness of a sample versus the population of interest. In both instances, pre-audit company presented data influenced auditors. In an investigation of the data acquisition heuristics used by equity analysts, Biggs (1984) traced the information acquisition strategies and decision making capabilities of expert financial analysts. Using verbal protocol, Biggs studied 11 experienced equity analysts and found that the analysts used two basic decision strategies historical and predictive to determine which of five paper companies was the most likely to be the top performer over the next fiveyear period. The convergence of data acquisition strategy and decision methodology shows that training and expertise development can cause groups of experts to frame a decision similarly while also allowing for the fact that experts can and do frame the same task differently. Ashton and Ashton (1990), in an important empirical investigation of confirmation bias, propose that confirmation bias can only be measured within the context of the decision being made. The authors argue that many prior studies have misrepresented the function of an auditor. Because ``the purpose of auditing is to enhance credibility'' (Ashton and Ashton, 1990, p. 3), training and experience lead to search heuristics that focus on negative data: the auditor seeks to find negative data, as that is part of the audit function. In a series of tests, auditors were studied in an auditing task environment and auditors and executives were studied in a non-auditing task environment. In the auditing task environment (two experiments), the auditors were more responsive to negative rather than positive financial data. In the non-auditing environment, the auditors responded in a similar manner, but the executives did not exhibit negative responsiveness. Ashton and Ashton propose that experience and

training impact how auditors track and assess data. Cognitive heuristics and Academic papers: incentives lead to a search for negative data as ``negative evidence may be Behavioral considered good news for auditors'' (Ashton and Ashton, 1990, p. 16). research into Smith and Kida (1991) provide an extensive review of heuristic research in heuristics the accounting profession. The authors believe that because auditors, as a matter of practice, are paid to make judgments, the accounting profession is an 343 excellent industry within which to study judgment and decision making. They note that although much research in auditing has used experienced professionals, ``auditors appear susceptible to the same biases found in the heuristics literature'' (Smith and Kida, 1991, p. 473). Empirical studies support the basic research developed by psychologists that shows the prevalence of heuristic usage. The authors also believe that training and experience can mitigate heuristic bias, but that the complexity of real world experiences makes the elimination of bias problematic. Finally, Smith and Kida (1991, p. 473) note evidence:
suggesting that specialized heuristics may be used for tasks within an expert's domain, whereas basic heuristics may be used in situations in which the individual lacks the information or expertise to indicate a strategy better suited to a particular task.

Empirical research in the accounting discipline is supportive of the use of heuristics while recognizing the need to know how and when heuristics cause bias. The research also provides a foundation for judgment research within a real estate context with goals of identifying systematic data acquisition and understanding when and why heuristic use might bias a decision. Can we differentiate situations in real estate where expertise has little effect? Does a lack of information in a certain situation make experts more like novices? Real estate research Northcraft and Neale (1987) provide one of the first studies of heuristics and bias in a real estate setting. The anchoring and adjustment heuristic was studied in a home valuation context. A total of 48 undergraduate students participated in the study as novices and 21 real estate agents participated as experts in residential valuation. All participants provided estimates of market value, listing price, a price they would actually pay, and a minimum selling price for a specific house after reviewing information on the house and after being exposed to one of four levels of listing price. In all instances, both experts and novices anchored on the listing price. Even when the anchor price was less credible, anchoring was evident. The use of sales agents, however, as experts unfortunately reduces the strength of the results as sales agents are familiar with pricing techniques, but not necessarily residential valuation techniques. Also, if in the actual market for residential property sales agents are generally good at estimating value, then the sales agents' anchoring is not evidence of heuristic bias, but is instead a learned functional heuristic. The research shows a need for additional research into possible heuristic use and bias in real estate.

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In an extension of prior work on normative decision techniques in appraisal, Diaz (1990b) found that the information-processing techniques used to select sales comparables differed by level of appraiser expertise. Expert residential appraisers considered fewer comparable sales than novices did. The comparable selection process used by the expert appraisers indicates a schemadriven process that is cognitively efficient, but may lead to bias. Such a practice, however, may be learned, as residential appraisal has become very price competitive, volume oriented, and less geared to actual value determination. The residential appraiser may define his task as the justification of a sales price as opposed to an estimate of market value. This would confirm theory indicating that heuristics are functional. In a second study by Diaz (1997), experts and novices in an ill-structured appraisal environment did not anchor to the valuation estimate of an anonymous expert (Member of the Appraisal Institute (MAI)). Diaz also found that the dispersion in value estimates for expert appraisers was not impacted by the anchor, but was reduced for novices. Although heuristic theory might propose an anchoring effect if the anonymous expert was deemed relevant, the fact that the MAI was anonymous may have mitigated the respondents' use of the anchor. If a specific appraiser acknowledged by the field and known by those in the field to be an expert in appraisal was suggested as the expert, anchoring would have been more likely because the expert's appraisal valuation would have been considered more relevant. In a subsequent study, Diaz and Hansz (1997) found that appraisers valuing property in areas within which they have limited knowledge anchor to an anonymous appraiser's prior opinion. This may indicate a generally functional heuristic when experts are faced with insufficient domain-specific knowledge. Without actual domain(market) specific knowledge, anchoring to a report generated by a fellow MAI, may be a rational response. Levy (1997) found that na ve experiment participants evidenced a recency effect (possible anchoring) caused by the order in which value estimates were generated. The estimate of a specific property's selling price was affected by the prior property on which selling price was estimated. The research confirms general heuristic use when faced with an unfamiliar task. Concurrently, it begs the question, ``Does the sequencing of house showings by sales agents affect which house a purchaser may decide to buy?'' Gallimore (1994) studied three information-processing heuristics including the anchoring and adjustment heuristic, the recency heuristic, the use of less relevant information or feedback due to the timing of exposure, and the dilution heuristic, the ability of less relevant data or noise to reduce the use of relevant data, using a survey methodology to obtain 276 responses (from a mailing of 498). In the test of the anchoring and adjustment heuristic, the respondents were segmented into two groups by the incorporation of two versions of the following question in the questionnaire:
Which of the following statements would you agree with? Circle letter A or B at the end of the statement with which you agree.

version used a 20 percent level. A later question embedded in the questionnaire asked for the respondents to state the amount of variability that is typically found in an appraisal. The respondents with the 20 percent question provided a statistically significant higher estimate of variation than those respondents with the 5 percent question. To test the recency heuristic, respondents were given a 50 percent confidence interval of the market value of a property on a per square foot basis. Respondents were segmented into two groups by presenting two sequences of comparable data that the respondents could use to adjust their initial confidence intervals. The comparables presented were in one of the two following sequences: two confirming comparables followed by two disconfirming comparables or two disconfirming comparables followed by two confirming comparables. The group receiving the confirming comparables last were more confident in their value estimate than the group receiving the disconfirming comparables last. To investigate the dilution heuristic, two groups of respondents were given data on the rental rate of a retail property either simultaneously or on a sequential basis and asked to state their level of confidence in the given rental rate. No presentation effect was shown as the two groups were equally confident in the estimated rental rate. Gallimore was able to show that heuristic bias might exist in the valuation of real estate assets, but the method of analysis (questionnaire format) might not be realistic enough to make the respondents expend sufficient cognitive effort to mitigate the evidenced bias. The fact remains, however, that the general use of heuristics and their potential biasing effect were present even with more experienced respondents. This confirms prior decision research on consumers, accountants, and real estate appraisers. The anchoring and adjustment heuristic has also been investigated in the context of real estate negotiation with mixed results. Black and Diaz (1996) showed in a controlled experiment using graduate students and real estate professionals that asking sales price can serve as an anchor. This is preliminary confirmation of another area where heuristic bias might be likely. A weakness in the study was the fact that no controls for expertise were noted and students in real estate are taught that having a well-defined and accurate asking price is a requirement for selling a property. Black (1997) did a follow-up study to determine if a better presentation of salient facts might mitigate anchoring. In cases where the negotiations were concluded, anchoring may have been evident. An alternative explanation to the experiment's results, however, is possible as six (6) of fifteen (15) negotiating groups with a ``high'' asking price were unable to reach a negotiated price even when instructed to do so.

Academic papers: Behavioral B (Gallimore, 1994, p. 102) research into One of the questionnaire versions used the 5 percent level from above and one heuristics
Freehold prices typically vary by 5 percent or more on either side of average price Freehold prices typically vary by less than 5 percent on either side of average price A

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Hardin (1997) in a descriptive study of experienced real estate and commercial lenders found that experts do have identifiable data search patterns and that these patterns differ by domain of expertise. In this study, two groups of experienced lenders evidenced different data relevancy and acquisition strategies. The differing data acquisition strategies led to different cue utilization and different lending decisions. Hardin could have tested the anchoring and adjustment heuristic, but instead allowed that each group would have functional but different heuristic use based on training, feedback and domain-specific expertise. What is unique about the study is that substantial insight was provided without the need to test for heuristic bias. Any inferred bias would have been due to different task definitions. In short, if the researcher postulated one correct data acquisition strategy for both groups, then bias would have been manifested. In a dynamic environment like that found in real estate, actual domains of expertise may be narrow and definition of experience or expertise critical. In a study of appraisers in the United States and the United Kingdom, Gallimore and Wolverton (1997) found that task definition may differ by country due to data availability and requirements on the disclosure of pending sales price. Choice of comparable sales differed by country, although in the United Kingdom sales price knowledge also served as an anchor. This research was descriptive and provides support for domain-specific, but culturally sensitive, effective heuristics. Diaz and Wolverton (1998) found that appraisers might anchor to their own previous estimates of value. In a longitudinal study requiring the re-appraisal of real property, it was concluded that the appraisers were less likely to make adjustments in value. The authors contend that this may be a reason for the smoothing effect found in many real estate indices. The information-processing paradigm has been introduced to the real estate literature and to real estate academics. Bias caused by heuristic use has been identified with novices, experts and in certain instances where study participants have limited data or some form of task unfamiliarity. Progress has been made in expanding descriptive research and in expanding research to experts within the field of real estate. A general acknowledgement of the potential biasing effect of heuristic use can be made with regard to real estate decision making, but the when, why and how have not been adequately addressed. Advancing from this foundation should be the next task. Implications Integration of theoretical and empirical research There is a substantial theoretical foundation on the development and use of information-processing heuristics. Simon (1957, 1978) and Newell and Simon (1972) have developed a theory of human information processing that acknowledges human weaknesses in data acquisition and interpretation while allowing for an overall framework that permits the development of successful data simplification heuristics. Evans (1989) expands this theoretical foundation

to include the use of schema as well as a potential positivity bias in the human Academic papers: information-processing system. Hogarth (1981) emphasizes that heuristics are Behavioral generally functional and that feedback and training are important in the research into generation of heuristics. While acknowledging the potential biasing effect of heuristics heuristics, Hogarth concludes that experience and feedback should mitigate much bias. In essence, if the heuristics are always biasing, why do they 347 continued to be developed and used? Baron (1985) is in agreement with the theoretical work of Newell and Simon, and Simon, but concludes that the inherent human proclivity for biasing heuristics can be offset via experience, training and education. Human information processors can, and do, rise above minimal cognitive responses when making a judgment or choice, but only with feedback indicating that past data selection and heuristics usage have been biased. The question that begs to be asked is ``Is it enough for real estate researchers to show that heuristics affect decisions in real estate, especially with na ve or novice decision makers?'' The position taken in this paper is that it is not enough to only show that novices, or experts given little data, may be subject to heuristic bias. Additional studies at the real estate specialization level might use novices to show potential heuristic bias with subsequent studies comparing experienced practitioners with novices. Reasons for heuristics bias would be developed. A critical question to be asked is whether lack of data or lack of actual heuristic development might be the cause for observed sub-optimization in real estate decision making. Do experts and novices exhibit the same behavior when little relevant data are presented and different behavior when given a choice between relevant and irrelevant data? Concurrently, real estate researchers must move forward with substantive theory development and research in addition to research at the novice level. The development of real estate-specific decision making theory and subsequent empirical testing has to be addressed. A final area of interest would be the interaction between real estate experts and the actual decision making process. Since for most individuals and even corporate and investment entities, major real estate related decisions are infrequent, the role of the real estate expert is a crucial area for study. This area has substantial implications for the use of experts in any situation. What role do experts play and are there limits to their effectiveness? Is the expert the decision maker or just in a position to influence the decision maker? Real estate research in decision making should incorporate Shanteau's (1992) Theory of Expert Competence. The use of information-processing heuristics will be productive when coupled with domain-specific knowledge and sufficiently developed cognitive skills that allow for effective data retrieval and interpretation. However, even with the development of preconscious and conscious information-processing skills, the manifestation of real estate expertise may be limited because of the actual characteristics of the task that is being solved. This is not to say that expertise does not exist, but to suggest that its quantification may be limited by its specialization. Heuristic bias found by

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researchers may only be indicative of poorly specified expertise or a lack of its application during the research process. Some domains cannot or do not provide for adequate, timely, and relevant feedback while many task environments have such variability in input data that the development of the cognitive skills necessary to manifest expertise is limited, but not non-existent. Consequently, the ability to develop both procedural and declarative knowledge should be investigated with the goal being the determination of the extent of both types of knowledge. Can we show that real estate practitioners develop procedural knowledge and problem resolution related heuristic use? The outcomes from employing such knowledge may differ, but its application may be similar across tasks. For example, Hardin (1997) shows that differing groups of real estate lending professional develop procedural heuristics that are job or task dependent. These procedural heuristics, however, lead to differing lending outcomes, but are not indicative of heuristic bias. Research questions should focus on the actual manifestation of expertise and when and why heuristic bias might occur with the base case, once again, being functional heuristics. A belief that heuristic development is cognitively beneficial should be a theoretical foundation. Finally, as previously noted, in the context of real estate research, there is a lack of cogent theory with most studies attempting to say that people facing a real estate decision are subject to bias primarily due to the fact that real estate is composed of ill-structured decision making tasks. However, since functional expertise can be, and is, developed in real estate specializations, a generic argument for heuristic bias due to the ill-structured environment of real estate is not sufficient. Real estate research may be captive to Hogarth's (1981) critique that heuristic research is enamored by definition while losing sight of the fact that heuristics must be useful or they would not be developed. Investigations of declarative and procedural knowledge, as specified above, and theory development will allow for a better foundation than allusions to an ill-structured environment and task. Real estate-specific theory of when, why and how heuristics affect real estate related decisions is needed. This is a major task and is of paramount importance. Diaz (1993) may provide a foundation for this theory with his defense of real estate as a separate academic discipline. If we look at the real estate industry as an overlay of all business disciplines with real property as the focus, a theory of decision making may be formulated. Real estate decision making is composed of novices, numerous experts and overlapping domains of expertise. The interaction of real estate decision makers and the use of expertise can be incorporated into theoretical development. For example, the very existence of expertise may limit macro-level decision making as task complexity limits general ``real estate'' expertise. For example, a real estate attorney is challenged on a daily basis with changes in code and enforcement and must expend much effort to retain domain-specific expertise. Consequently, the attorney may not be an expert except in one area of specialization, real estate law. When faced with a real estate decision his domain-specific knowledge and heuristics are

likely to dominate. A global theoretical framework is needed to address this Academic papers: type of interaction. This will allow for consideration of when, why and how Behavioral heuristics affect decision making. research into As a first step in theory development, the definition of real estate as a heuristics discipline can be integrated into Shanteau's Theory of Expert Competence to formulate when real estate-specific heuristic might exist. It is possible that such 349 theory would dictate that heuristic bias exists at the novice level due to insufficient domain knowledge. This has been shown to be the case in other disciplines, but theory has been generally lacking unless one uses the general heuristics and bias literature. At the expert level, one should see more heuristic use but less heuristic bias. Why is this the case? Heuristics only exist and become preconscious when one gets positive feedback. If this is not the case, then additional theory of the task environment may be necessary. A theory of real estate decision making should postulate when and why heuristic bias occurs with novices and experts and when real estate decision makers interact with one another. Finally, real estate research must incorporate practice and theory. This can be done with descriptive studies to determine the existence of informationprocessing heuristics. It can also be done through the use of domain-specific experts in the experimental design stage of research. If one wants to determine if experts use, and or, are biased by heuristics, one will have to move to real world, empirical research. This is difficult as it is time consuming and extremely unappreciated, but is necessary to advance knowledge. Research design becomes paramount. Additional goals and objectives In addition to the mentioned need for theory, which is a formidable requirement, real estate researchers are faced with several choices. The first and foremost is whether they simply want to replicate the existence of heuristics in a new discipline. The goal in this case would be to show that in various real estate decisions, people are subject to bias through the use of general heuristics. This may be a laudable goal, but must be tempered by the lack of discipline specific theory and few real estate outlets for publication. The research would be more ``mainstream'' decision making with real estate as the avenue for investigation. A second choice is available and has been employed to some extent by several real estate researchers including Diaz, Gallimore, Wolverton, and Hardin. This choice is to concentrate research on procedural knowledge, the testing of data relevancy by experts and comparisons between novice and experts. Specific goals would include the documentation of heuristic use, the documentation of when bias occurs and the development of theory on why this bias might occur. There is substantial difficulty in selecting this route. Questions of the definition of an expert persist. The lack of large numbers of

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experts within domains of expertise is apparent. Experimental design is critical and differs substantially from most forms of analysis used in real estate and finance. The study of experts is critical for acceptance of heuristic use and potential bias in the general real estate literature. If experts are affected by heuristic bias as opposed to just novice participants in a controlled experiment there would be a broader acceptance of decision making research. At a theory testing level, real estate research could provide the means to advance past the psychological research by empirically testing a possible mitigating effect when expertise is developed and by testing if, in fact, heuristic bias exists within domains of expertise as opposed to potentially misidentifying expertise and bias. Real estate and business researchers in general have a better opportunity to move theory forward because their fields of interest are applied. This allows for access to experts and better experimental design. Finally, theoretical and empirical research should be expanded from the valuation area which remains an important base of study, to include other areas of real estate decision making. Commercial real estate lending is an area of interest as the complexity of large commercial transactions requires judgment and decision making skills. Differences between lender types and lender institutions is a viable research option. Lender versus equity underwriting can also serve as a basis for investigation. With regard to residential real estate, there are numerous avenues of study. The interaction between realtors and clients, the difference between novice and expert home purchasers, presentation effects, etc. are all open to investigation. In addition, the effect of heuristics on the negotiation process is a viable research venue. Since real estate is generally purchased through a negotiated process, this is potentially a rich area for investigation. There are substantial other areas for research with experimental design and data acquisition being the major obstacles to productive research. If one considers that behaviorists in consumer research can convincingly argue that ad placement affects retention, then options for research in real estate seem almost limitless. The goals are simple. Develop theory much as consumer behaviorists have done, test theory on novices and experts and show how heuristics might affect real estate decision making. This will be of substantial interest both within the real estate field and within the decision making literature. Research should test Evans' and others' hypothesis that heuristics are functional with a framework provided by Shanteau adapted to the real estate decision making environment. External validity must become important in addition to the testing of theories of heuristic use. This will tie theory to practice and relevance.
Notes 1. A heuristic is a cognitive short-cut that allows for a reduction in the amount of information processed. It, in essence, is a cognitive data reduction process. Cognitive process simplification can be based on data, as well as declarative and procedural knowledge.

2. Schema are domain-specific cognitive processes for interpreting declarative and procedural knowledge. See Evans (1989) for additional discussion of schema. 3. Problem space is how the decision maker cognitively perceives the problem to be solved. 4. The task environment is the actual problem to be solved. 5. Functional heuristics are those that are effective in completing the decision task. For heuristics to develop positive feedback is required. Much in the literature portrays a heuristic bias where sub-optimal decisions are being made. It can be argued that this bias might be a function of researchers' misidentification of the actual task. The task environment as manifested to the decision maker is being solved. 6. The base-rate frequency is the rate at which an event actually occurs within a population of interest. 7. These are generally defined as Character, Capacity, Capital, Conditions and Collateral. 8. A $750,000 five-year amortizing term loan secured by equipment to a company with sales of $20 million. References Ashton, R. and Ashton, A. (1990), ``Evidence-responsiveness in professional judgment: effects of positive versus negative evidence and presentation mode'', Organizational Behavior and Human Decision Processes, Vol. 46, pp. 1-19. Baron, J. (1985), Rationality and Intelligence, Cambridge University Press, Cambridge. Beaulieu, P. (1994), ``Commercial lenders' use of accounting information in interaction with source credibility'', Contemporary Accounting Research, Vol. 10, pp. 557-85. Bettman, J., Johnson, E. and Payne, J. (1991), ``Consumer decision-making'', in Robertson, T. and Kassarjian, H. (Eds), Handbook of Consumer Behavior, Prentice-Hall, Englewood Cliffs, NJ, pp. 50-84. Biggs, S. (1984), ``Financial analysts' information search in the assessment of corporate earning power'', Accounting, Organizations and Society, Vol. 9, pp. 313-23. Black, R. (1997), ``Expert property negotiators and pricing information, revisited'', Journal of Property Valuation and Investment, Vol. 13 No. 3, pp. 274-81. Black, R. and Diaz III, J. (1996), ``The use of information versus asking price in the real property negotiation process'', Journal of Property Research, Vol. 13 No. 2, pp. 287-97. Brucks, M. (1985), ``The effects of product knowledge on information search behavior'', Journal of Consumer Research, Vol. 12, pp. 1-16. Diaz III, J. (1990a), ``How appraisers do their work: a test of the appraisal process and the development of a descriptive model'', The Journal of Real Estate Research, Vol. 5 No. 1, pp. 1-15. Diaz III, J. (1990b), ``The process of selecting comparable sales'', The Appraisal Journal, Vol. 58 No. 4, pp. 533-40. Diaz III, J. (1993), ``Science, engineering, and the discipline of real estate'', The Journal of Real Estate Literature, Vol. 1 No. 2, pp. 183-95. Diaz III, J. (1997), ``An investigation into the impact of previous expert value estimates on appraisal judgment'', Journal of Real Estate Research, Vol. 13 No. 1, pp. 57-66. Diaz III, J. and Hansz, J. (1997), ``How valuers use the value opinions of others'', Journal of Property Valuation and Investment, Vol. 15 No. 3, pp. 256-60. Diaz III, J. and Wolverton, M. (1998), ``A longitudinal examination of the appraisal smoothing process'', Real Estate Economics, Vol. 26 No. 2, pp. 349-56. Evans, J. (1989), Biases in Human Reasoning: Causes and Consequences, Erlbaum, Hillsdale, NJ.

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Folkes, V. (1988), ``The availability heuristic and perceived risk'', Journal of Consumer Research, Vol. 15, pp. 3-23. Gallimore, P. (1994), ``Aspects of information processing in valuation judgement and choice'', Journal of Property Research, Vol. 11 No. 2, pp. 97-110. Gallimore, P. and Wolverton, M. (1997), ``Price-knowledge-induced bias: a cross-cultural comparison'', Journal of Property Valuation and Investment, Vol. 15 No. 3, pp. 274-81. Hardin III, W. (1997), ``Heuristic use, credit constraints, and real estate lending'', Journal of Property Valuation and Investment, Vol. 15 No. 3, pp. 245-55. Hogarth, R. (1981), ``Beyond discrete biases: functional and dysfunctional aspects of judgmental heuristics'', Psychological Bulletin, Vol. 90, pp. 197-217. Janiszewski, C. (1988), ``Preconscious processing effects: the independence of attitude formation and conscious thought'', Journal of Consumer Research, Vol. 15, pp. 199-209. Kanaan, G. (1993), ``Psychology and financial decisions: a literature assessment'', Managerial Finance, Vol. 19, pp. 1-10. Kinney, W. and Uecker, W. (1982), ``Mitigating the consequences of anchoring in auditing judgments'', The Accounting Review, Vol. 57, pp. 55-69. Levy, D. (1997), The Impact of the Examination of a Property on the Perception of Value and Desirability of a Following Property, paper presented at RICS Cutting Edge Property Research Conference, Dublin. Newell, A. and Simon, H. (1972), Human Problem Solving, Prentice-Hall, Englewood Cliffs, NJ. Newell, A. and Simon, H. (1981), ``Computer science as empirical inquiry: symbols and search'', in Haugeland, J. (Ed.), Mind Design, MIT Press, Cambridge, MA. Northcraft, G. and Neale, M. (1987), ``Experts, amateurs, and real estate: an anchoring perspective on property pricing decisions'', Organizational Behavior and Human Decision Processes, Vol. 39 No. 1, pp. 84-7. Shanteau, J. (1992), ``Competence in experts: the role of task characteristics'', Organizational Behavior and Human Decision Processes, Vol. 53, pp. 252-66. Shields, M. (1983), ``Effects of information supply and demand on judgment accuracy: evidence from corporate managers'', The Accounting Review, Vol. 58, pp. 284-303. Simon, H. (1957), Models of Man, Wiley, New York, NY. Simon, H. (1978), ``Information-processing theory of human problem solving'', in Estes, W.K. (Ed.), Handbook of Learning and Cognitive Processes, Vol. 5, Erlbaum, Hillsdale, NJ. Smith, J. and Kida, T. (1991), ``Heuristics and biases: expertise and task realism in auditing'', Psychological Bulletin, Vol. 109, pp. 472-89. Sujan, M. (1985), ``Consumer knowledge: effects on evaluation strategies mediating consumer judgments'', Journal of Consumer Research, Vol. 12, pp. 31-46. Tversky, A. and Kahneman, D. (1971), ``Belief in the law of small numbers'', Psychological Bulletin, Vol. 2 No. 1, pp. 105-10. Tversky, A. and Kahneman, D. (1972), ``Subjective probability: a judgment of representativeness'', Cognitive Psychology, Vol. 3 No. 3, pp. 430-54. Tversky, A. and Kahneman, D. (1973), ``Availability: a heuristic for judging frequency and probability'', Cognitive Psychology, Vol. 5 No. 2, pp. 207-32. Tversky, A. and Kahneman, D. (1974), ``Judgment under uncertainty: heuristics and biases'', Science, Vol. 185, pp. 1124-31.