Across the nation and here in California, home prices are rising rapidly despite the ongoing recession, leading to what Economist Robert J. Shiller calls an “uncomfortable feeling.”
In a recent interview on Bloomberg, Shiller presents the idea that people are buying partly due to their Fear of Missing Out (FOMO).
Shiller co-authored the book “Animal Spirits” in 2009, alluding to the emotional changes that drive the economy. According to this theory, emotions (like FOMO) are correlated with the business cycle. Previously, it was used in Keynesian economics to oppose decision theory, the idea that presumes people know probabilities of future events.
Our animal spirits are comprised of five main influences:
- money illusion; and
All five of these categories have strong effects on the economy. By ignoring the role human emotions play in purchasing and financial decision-making, policies will be created that won’t hold up to these constantly changing animal spirits. Economic forecasters may also end up ignoring the all-important factor consumer emotions play in market movements. Housing, a segment of the economy Shiller says is hard to predict, is also driven by psychological factors. The COVID-19 experience of being forced to spend more time at home has boosted demand for single family residences (SFRs), but the supply is not there to match demand. Shiller recommends the response to this supply-demand imbalance…