The Irrational and Rational in Real Estate and Climate Change


If this is correct, it would seem that — whatever they may tell politicians and pollsters — many Rhode Islanders don’t actually believe in global warming when it comes to putting their own skin in the game:

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“The price of any asset, be it commodities, gold, stocks, depends fundamentally on people’s beliefs,” said Lint Barrage, assistant professor of economics and environmental studies at Brown University. “If people are excessively optimistic about the future value of an asset, there is potential for mispricing, and bubbles and overinvestment.”

Speaking Friday at a one-day conference at Brown on the political and economic consequences of climate change, Barrage described her research on the coastal property market, which included going door-to-door in Rhode Island and interviewing homeowners about flood risk. People with homes in federally designated flood zones tended to underestimate the risk of flooding when compared with people who lived further inland, she found.

“The reason all this matters is that markets cannot price risks efficiently if people don’t believe in them,” she said.

And if the risks of climate change aren’t being accurately factored into prices now, then it could mean a steep drop in values somewhere down the line.

Of course, people’s beliefs and the decisions they make based on them are complicated.  If a waterfront property is highly desirable and brings prestige right now, people may tend to discount the risk of owning it in the long term even if they fully believe that climate alarmists are not actually alarmists.

But then, on the other side of the ledger, one has to consider that — consciously or not — people assess risk to some extent on what they observe, rather than what they are told to expect.  Thus, they may pick up on the fact that warnings about sea-level increases tend not to match our experience.  They may also pick up on the fact that, when the alarmists try to present scary scenarios, they have to go way back in the past or project way out into the future.

In short, one can’t rule out the possibility that people are right to place these bets as they do.

  • ShannonEntropy

    Have you noticed how the language of the Climate Alarmists keeps changing ??

    First it was “Global Warming”. Then around 2012 when it was obvious the planet wasn’t warming it became “Climate Change”. Now they sweep every weather anomaly under the umbrella of “Extreme Weather”

    Nobody seems to be paying attention to Solar Scientists who are predicting that most likely we are in for a new Ice Age shortly:

    Also, volcanic activity has been increasing rapidly recently. One good eruption of a ‘super-volcano’ like Yellowstone could plunge the World into a ‘nuclear winter’ for years

  • Joe Smith

    The reason all this matters is that markets cannot price risks efficiently if people don’t believe in them,” or people factor in the political calculus that many in the same situation will cause the government to bail them out.

    It’s a sub-optimal outcome from game theory; the efficient solution would be for those at risk to pool in a form of self-insurance (like the NFIP); however, knowing the government will bail you out regardless and won’t enforce (or doesn’t have the political will) a mandate, both the homeowners and lenders see the individual best response is to not get insurance.

    It’s actually very rational at the individual level; however, collectively, if most people do this, you get the sub-optimal group outcome described below in Sep 2018 story in NYT. I would think a professor economics at Brown would know that incentives matter instead of just jumping to the conclusion of irrational thinking.

    “Not well. It needs more premium-paying policyholders, said Mr. Lehmann. That would spread the risks over a bigger group. As of now, the program does not bring in enough revenue to cover the cost of payouts to homeowners. On average, it has run a $1.4 billion annual deficit since Hurricane Katrina.

    The program can borrow up to $30.4 billion from the Treasury, but it has been unable to pay the money back. Congress tried to raise flood-insurance premiums in 2012, to bring them into line with the cost of claims. But homeowners rebelled, and the law was repealed two years later.

    The program currently owes the Treasury more than $20 billion, but that’s only because Congress forgave $16 billion of debt last fall.

    That debt forgiveness was essentially a taxpayer bailout. In other words, federal taxpayers are still paying to repair flood-damaged houses today, much as they did before the flood-insurance program was established.”

  • BasicCaruso

    Will give a whole new meaning to underwater on one’s mortgage.
    By 2100, high tide flooding will occur ‘every other day’ (182 days/year) or more often… with tidal forcing causing all (100%) of the floods except within the Eastern Gulf (80% caused by tides). By definition, ‘every other day’ high tide flooding would bring to fruition the saying championed by NOAA’s (late) Margaret Davidson: “Today’s flood will become tomorrow’s high tide.”

  • Rhett Hardwick

    I still remember when the “Consensus of Scientists” was “the Earth would run out of petroleum on June 3, 1987″. I may be wrong on the year, but I am certain of the decade.

    • BasicCaruso

      Scientists also at one time thought the earth revolved around the sun. Still not prudent to therefore dispute gravity and jump off a roof.

      Given what we know now, what’s the prudent course of action?

      • Rhett Hardwick

        “Scientists also at one time thought the earth revolved around the sun.”

        You mean it doesn’t?