Home Maker

How inflation boosts homeownership
image of a polaroid photo of a mother and son inside a home.

Between high inflation, rising interest rates, and general economic uncertainty, it may not feel like the right time to plunge into the housing market. But if past patterns hold true, people who are living through this time may be more inclined to buy a house in the future.

New research co-authored by Professor Ulrike Malmendier and published in the Journal of Finance has shown that people who experience periods of high inflation in their lifetimes are significantly more likely to own a home. This even holds true when people from high-inflation countries immigrate to the U.S.

“People who have lived through a lot of inflation like to hedge themselves by putting money into a real asset,” says Malmendier, who coauthored the paper with Alex Steiny Wellsjo, BA 10 (economics, cognitive science), PhD 20 (economics), of UC San Diego’s Rady School of Management. “If this has been your experience and you’re choosing whether to rent or buy a home, you might opt to buy.”

Building on Malmendier’s prior work demonstrating the long-lasting effect of economic shocks on people’s attitudes and behaviors, the paper is the first to show that personal experience with inflation can drive homeownership both within and across different countries.

The researchers found that European countries with more historical inflation had higher rates of homeownership than those with more stable financial histories. Likewise, within a given country, people who had experienced greater inflation over their lifetimes were more likely to own a home than those who had experienced less.

Numerically, increasing a typical household’s experience with inflation of 2% to inflation of 5.4% increased their likelihood of homeownership from 65% to 75%.

The researchers also collected information on 1.4 million households that had immigrated to the U.S. from a range of high- and low-income countries. Controlling as much as possible for things like relative income and wealth, they again found that past experiences with inflation were tightly coupled with levels of home ownership. Experience with inflation even overshadowed housing market prices when predicting people’s decisions.

Image of a construction site of new homes being built.

“When people come [to the U.S.] from a country with high inflation, it seems that experience really scars them,” Malmendier says. “Even when they’re in a completely different place with different monetary policies, they carry this worry that their money will lose value unless they put it into something like real estate.”

What drives these results is an open question, but Malmendier suspects it might be related to “availability bias,” the psychological phenomenon in which our brains jump to the knowledge or experiences that are most salient to the issue on hand. If people face the choice of locking the value of their money into a tangible asset, they may be swayed by calling to mind a memory of currency values fluctuating wildly.

“If I live through a financial crash, my brain has been reprogrammed, it has been scarred; different neural synapses have formed and been activated,” Malmendier says. “This person you’re talking about is now a different person. The policymaking realm does not put enough thought into this.”

Nonstop Futility

Searching for a cheaper flight? There’s no secret trick.

Image of a plane crossing the sky with multicolored trails of other planes.Buy on a Tuesday. Search in your browser’s incognito mode. Use a VPN to pretend you live in Suriname.

“There are so many hacks out there for finding cheaper airline tickets,” says Assistant Professor Olivia Natan. “But our data shows many of these beliefs are wrong.”

Natan and colleagues from the University of Chicago, Yale, and the University of Texas at Austin looked deeply into how prices are set at a major U.S. airline. The system she found, which is representative of airlines worldwide, was strikingly at odds with what many economists would expect—and most consumers assume.

Substituting convenience for price

When people search websites like Google Flights or Kayak, a range of different flights from the same airline appear. Travelers tend to balance convenience and cost: The price of one flight might push people to select a slightly less convenient but cheaper flight.

“But airlines don’t consider this kind of substitution,” Natan says. They set the prices of seats on each individual flight on a given route separately, “even though changing the price on one flight will affect the way people think about all their options.”

A small menu of preset prices

Perhaps most surprisingly, airlines also don’t incorporate the prices of their competitors into their automated price-setting. This behavior, Natan explains, is the result of a specific pricing heuristic—or decision-making shortcut—that airlines use called Expected Marginal Seat Revenue-b. The use of this, the researchers show, results in another outcome that consumers may not expect.

Despite how it may appear when searching flights, airlines have a fixed and relatively small number of prices that they assign to tickets on each flight. Unlike other consumer sectors, where pricing can be adjusted down to the penny, airlines operate with large gaps between each possible price—sometimes upwards of $100. They may sell the first 30 economy tickets at the lowest price, then the next 30 tickets at the next possible price, and so on.

“Airline tickets are sold through global distribution systems that make sure a travel agent in Wichita or Miami sees the same price you do on your computer,” Natan says. This system emerged from an industry alliance to facilitate inventory management. Other travel products, like hotel rooms, cruises, and car rentals, do the same. The downside is that airlines are relatively unresponsive to real-time changes in cost, as the next discrete fare is often a significant jump up.

Despite how it may appear when searching flights, airlines have a fixed and relatively small number of prices that they assign to tickets on each flight.

Lack of coordination across departments

One of the strangest discoveries from the research relates to the process airlines use to set their prices. To an economist, Natan explains, there is never a reason that firms would not raise prices if the increase assures an increase in revenue. But the set of possible prices chosen by the pricing team nearly always includes an option that is too low.

“We found they could make more money today by selling fewer tickets at higher prices and not foreclose future opportunities,” she says. “In practice, they choose the menu of prices without using their internal demand predictions.”

Interestingly, the revenue management team corrects much of this underpricing. Before tickets go on sale, this team makes demand forecasts that determine final prices. These forecasts are routinely inflated, reducing the number of underpriced tickets shown to consumers by roughly 60%.

“We find that these prices are a consequence of teams from different departments choosing the best pricing inputs when they are unable to coordinate,” Natan says. Or, airlines might not maximize short-term revenue to build customer loyalty or avoid regulatory scrutiny, she speculates.

Over the next several years, Natan says, airlines may start to adopt more dynamic pricing platforms, and non-business travelers may benefit from these changes. But for now, the hunt for a trick to find lower fares is largely futile. “What I can say is that prices do go up significantly 21, 14, and 7 days before a flight,” Natan says. “Just buy your ticket before then.”

Berkeley Haas launches O’Donnell Center for Behavioral Economics to lead the next generation of research

Established with a philanthropic investment of almost $17 million from Robert G. and Sue Douthit O’Donnell, the new center will bring together the best minds from a wide range of fields.

An aerial view of the Haas School of Business campus showing a wide staircase leading up to an arched entry between two buildings.

Berkeley, Calif.—Ever since Nobel laureates George Akerlof and Daniel Kahneman created a 1987 UC Berkeley course that broke the rigid barrier between psychology and economics, the university has led the way in bringing the once-disparate disciplines together into the field of behavioral economics.

More than 35 years later, the Haas School of Business is launching the Robert G. and Sue Douthit O’Donnell Center for Behavioral Economics to advance the field toward its next stage of evolution.

Portrait of a woman with shoulder-length dark blond hair and purple blazer.
Professor Ulrike Malmendier (Photo: Copyright Noah Berger)

“We went from neoclassical economics that considered humans to be perfectly rational, to behavioral economics that brought in social psychology,” says Ulrike Malmendier, the Cora Jane Flood Professor of Finance, who will serve as the center’s faculty director. “Now we want to move the needle further, bringing together the best minds for rigorous research on human behavior from the sciences more broadly—including neuroscience, cognitive science, biology, medicine, epidemiology, and genetics.”

Funded with a philanthropic investment of almost $17 million by Bob O’Donnell, BS 65, MBA 66, and his wife, Sue O’Donnell, the center aims to become the preeminent hub for the maturing fields of behavioral economics and finance, bringing together leading researchers from a wide range of disciplines for collaboration, conferences, and bootcamps, as well as funding promising PhD students and postdoctoral scholars. The center will also host the prestigious Behavioral Economics Annual Meeting (BEAM), co-founded by Malmendier, every three years.

A nexus for cross-disciplinary research

O’Donnell says he was inspired by the pioneering work of Kahneman, Akerlof, Malmendier, and others who gave Berkeley its leading position in behavioral economics. “UC Berkeley is dedicated to integrating business education with other disciplines on campus, which is essential in this area,” he says. “It should have a center devoted to continuing this work.”

The center, says Berkeley Haas Dean Ann Harrison, will create a far-reaching impact across UC Berkeley, a research powerhouse with many areas of strength. “The goal is to cut through barriers that traditionally hinder research across disciplines, such as different ways of presenting data and publishing results, and bring people together in a different way than what’s usually done,” she says. “The O’Donnell Center will be the nexus of a new form of cross-disciplinary collaboration that pushes behavioral economics toward the future.”

Beyond ‘homo economicus’

Traditional economics was based on the assumption that human beings are perfectly rational, profit-maximizing “robots”—sometimes referred to as “homo economicus” or “economic man,” Malmendier says. Behavioral economics brought in insights from psychology and human behavior to explore the predictable foibles in our thinking, such as decision-making biases, fears of losing out, lack of self-control, and overconfidence. A classic example is Kahneman’s pioneering work with Amos Tversky on loss aversion, which showed that people are willing to take greater risks to avoid a loss than to secure a gain.

These ideas have been integrated into economics and finance departments around the world and have deeply influenced public policy and practice. For example, after Nobel Laureate Richard Thaler and Cass Sunstein developed the concept of the “nudge”—interventions that spur people to act in their own self-interest, such as enrolling in a retirement savings plan—hundreds of “nudge units” were established in governmental and private-sector organizations around the world.

Many other Berkeley Haas researchers helped pioneer this intellectual revolution, including finance professor Terrance Odean, BA 90, MS 92, PhD 97, the Rudd Family Foundation Chair, who was convinced by Kahneman to pursue a doctorate in finance rather than psychology and whose work reveals investors’ flawed decision making.

O’Donnell, the center’s founding donor, says he often applied insights from behavioral economics during his career as a portfolio manager for a large mutual fund group. “It represents a further step in the evolution of financial theory comparable to the development of the efficient market hypothesis,” he says. “When combined with existing financial theory, I believe that its insights enhanced results for my clients.”

Yet, during the 17 years he taught an investment class in the Berkeley Haas MBA program, O’Donnell says he sometimes encountered skepticism when he introduced ideas from the field. “Indeed, one student asked, ‘Isn’t all this kind of woo-woo?’”, he says. “Several years later, that student told me how perspectives from behavioral economics had helped her career in finance.”

Experience effects

Now, after more than three decades of foundational work, it’s time to move behavioral economics past its adolescence, Malmendier says. “Behavioral economics made progress by including psychology, but we didn’t include all the other sciences.”

Malmendier, whose groundbreaking work on “experience effects” earned her a Fischer Black Prize in 2013 for the top economist under the age of 40 and a Guggenheim Fellowship in 2017, has focused on complex economic behaviors. She has studied how stressful experiences with recessions, layoffs, inflation, housing bubbles, and political repression make consumer and investor behavior more cautious and risk averse for years afterward, and she has explored how stress can affect our health, careers, education, and other aspects of life in dramatic ways.

To further that work, Malmendier aims to bring a wider range of researchers together and break down silos. For example, collaborating with neuroscientists, neuropsychiatrists, biologists, medical researchers, and epidemiologists who have studied stress and trauma could more precisely demonstrate how past experiences shape our actions today and across generations. Stress impacts the big variables that economists study, such as completing an education, choosing an occupation, and deciding to have a family, she says.

“As we walk through life, our outlook on the world changes, especially if we suffer trauma,” she says. “Neuroscience says our brain gets rewired. There may be a long-term impact of stress on our longevity, on our aging, and on our health.”

Questioning the status quo

Malmendier, who now serves on the German Council of Economic Experts, is passionate about the potential of behavioral economics to help leaders create better solutions to the most complex and urgent problems of our time—from fighting climate change to battling inflation and avoiding financial crises. “If leaders keep in mind people’s emotions, their personal histories, and their psychologies, they can engineer ways to make things more predictable and give people more control over events help them live better lives,” she says. “That is our ultimate goal.”

Photo of a man with light skin, short brown hair, and glasses, wearing a navy blue jacket with white collared shirt.
Professor Stefano DellaVigna

Moving the field forward will also involve rigorous research to reexamine what has come before. For instance, a recent paper by center co-founder Stefano DellaVigna, the Daniel E. Koshland Senior Distinguished Professor of Economics and professor of business, with Elizabeth Linos of Harvard, suggests that leaders should get more realistic about nudge policies—and better at incorporating them into practice. Two government nudge units opened their records to allow the researchers to look at all their interventions. By examining 126 randomized controlled trials of nudge policies involving 23 million people in the United States, the researchers found that nudge interventions are on average effective, increasing the desired outcomes by about 8%. However, the effects are less than those in published academic papers—about one-fifth the size. The authors attribute the difference to publication bias, or the tendency toward publishing only large, surprising results.

“Our study stresses the importance of research transparency,” DellaVigna says. “This transparent access is quite unique and shows a further innovative impact of behavioral economics, which has led to more evidence gathering within governments.”

In a second paper, DellaVigna and Linos, along with Department of Economics doctoral student Woojin Kim, found that even when nudge policies are found to be effective, public agencies implement them only about a quarter of the time, often due to organizational inertia.

In addition to Malmendier and DellaVigna, the center will include a host of affiliated researchers from Berkeley Haas and Berkeley Economics, as well as from across the university. They include Berkeley Haas professors Ricardo Perez-Truglia, Ned Augenblick, Don Moore, and Gautam Rao, PhD 14—who will join Haas in January from Harvard University—as well as Dmitry Taubinsky of Berkeley Economics and others. The founding gift will establish a permanent endowment to support the center and some of its ongoing activities.


Media Contact: Laura Counts, [email protected], 510.205.9570