The Psychology of Residential Developers: Lessons from Behavioral Economics and Additional Explanations for Satisficing (original) (raw)

2006, Journal of Planning Education and Research

The phenomenon of satisficing-the setting of suboptimal targets to which people aspire (Simon 1979)-has been widely observed among residential developers (Baerwald 1981; Hepner 1983; Leung 1987). 1 Drawing on behavioral theories of the firm proposed by Cyert and March (1963) and earlier writings by Simon (1957), Kenney (1972) attributed satisficing by developers to their bounded rationality. Because efficient land use requires developers to take advantage of all profit opportunities, suboptimal decisions by developers contribute to inefficient land use (Lucy and Phillips 2000, 27). 2 In particular, as efficient land use requires the full utilization of existing services and infrastructure, their underutilization by satisficing developers contributes to sprawl in the form of low-density and leapfrogging development (Nelson and Duncan 1995, 5). 3 In response, government policy makers have designed policies aimed at reducing risks to developers. Reducing risks is intended to help developers overcome the bounds on their rationality so that they will make decisions that result in more efficient land use. Early enunciations of this approach can be found in Kenney (1972, 220), and contemporary statements to this effect can be found in Berke, Godschalk, and Kaiser (2006, 200). Risk reduction policies include clear rules about zoning and allowable uses; fixed rather than negotiated exactions; transparent capital improvement programs; and predictable, streamlined approvals processes. Despite decades of experience, however, there is no evidence that risk reduction policies have caused developers to stop satisficing. Developers continue, for example, to choose exurban sites over locations promoted by policy makers. In light of their minimal impacts, it is time to step back and ask whether these risk reduction policies are based on a complete model of developer decision making. In particular, is bounded rationality the only explanation for the suboptimal choices that developers make? I address this question by drawing from the literature in behavioral economics, a field that studies the role of human psychology in economic decision making. Although this literature originally rested on the foundations of bounded rationality articulated by Simon (1957), it has blossomed since the 1970s to provide other psychological theories to explain economic decision making. 4 In this article, I argue that