The term of ‘choice architecture’ is originated from Thaler & Sunstein’s very interesting book Nudge (Penguin Books, London, 2009). In their own words “a choice architect has the responsibility for organizing the context in which people make decisions” (p.3) As it can be easily predicted there are several parallels between choice architecture and more traditional forms of architecture: “A crucial parallel is that there is no such thing as a ‘neutral’ design.” (p.3) Let me quote an important statement on structure complex choices: “People adopt different strategies for making choices depending on the size and complexity of the available options. When we face a small number of well-understood alternatives, we tend to examine all the attributes of all the alternatives and then make trade-offs when necessary. But when the choices set gets large, we must use alternative strategies and these can get us into trouble.” (p.103) Another quotation on ‘diversification’: “Don’t put all your eggs in one basket. In general, diversification is a great idea, but there is a big difference between sensible diversification and the naïve kind. A special case of this rule of thumb is what might be called the ‘r/n’ heuristic: ‘When faced with “n” options, divide assets evenly across the options. Put the same number of eggs in each basket.” (p.134)
Now, the reasons I have referred to this ‘sui generis’ (to certain degree) book and quoted some sections is to show that there are very interesting parallels between the main arguments forwarded throughout the book and the way we, as VIP Property, operate. We deal with the international clients who are kind of lost in numerous options. Even they do not confess, they are puzzled and ‘disoriented’. Our role is to help the clients, first of all, understand themselves. This statement might sound a bit weird, but truthfully speaking in practice this is the case. When the clients stat searching options in Istanbul market (wither for investment or personal use), they are not very much aware of the right questions or the necessary questions that need to be asked. Our role is to put forward these questions that the clients never asked themselves before. In that sense, our responsibility is “to organize the context”.
In the book, there is a good example on ‘structure complex choices’. Imagine Jane has been offered a job at a company located in a large city far from where she lives. She is facing two choices: which office to select and which apartment to rent. Suppose that Jane is offered a choice of three available offices in her workplace. A reasonable strategy for her to follow would be to look at all three offices, note the ways they differ, and then make some decisions about the importance of such attributes as size, neighbors, and distance to the nearest rest room. In the choice literature it is described as a ‘compensatory’ strategy, since a high value for one attribute (big office) can compensate for a low value for another (loud neighbors). No doubt, the same strategy cannot be used to pick an apartment. One strategy to use is what Amos Tversky (‘Elimination by Aspects: A Theory of Choice’, Psychological Review 76 (1972): 31-48) called ‘elimination by aspects’. Someone using this strategy first decides what aspect is most important (for instance, commuting distance), establishes a cutoff level (for instance, no more than a thirty-minute commute), then eliminates all alternatives that do not come up to this standard. The process is repeated, attribute by attribute (no more than $1,500 per month; at least two bedrooms; dogs permitted), until either a choice is made or the set is narrowed down enough to switch over to a compensatory evaluation of the ‘finalists’. When people are using a simplifying strategy of this kind, alternatives that do not meet the minimum cutoff scores may be eliminated even if they are fabulous on all other dimensions. So, for example, an apartment that is a thirty-minute commute will not be considered even if it has a dynamic view and costs two hundred dollars a month less than any of the alternatives. This is exactly the way we work: we figure out the attributes for the clients and then develop a strategy to eliminate till reach the ‘right’ option.
We also work on the balance between the incentives and the price. We put the right incentives to the right client by asking the right the questions. What are the ‘best’ options (surely by analyzing what the best is and why, what makes this option ‘best’), in long-term what the benefits are, how we can avoid short-term tricky and not genuine so-called ‘benefits’, and so on.
We also work on the diversification in favour of the clients. We encourage the clients to diversify their investments, i.e. ‘put the same number of eggs in each basket’.
Final point: when we are working on the options, we know which options could lead to which consequences from practice by not only applying the ‘rule of thumb’, but also by analyzing each case in depth.
Evren Erem, VIP Property
