Pessimism bias in polling

Tyler Cowen recently linked to a study that suggests the public does not believe in supply and demand, at least when applied to the housing market:

Recent research finds that most people want lower housing prices but, contrary to expert consensus, do not believe that more supply would lower prices.

Before addressing housing, it’s worth noting that a similar sort of pessimism crops up in many other contexts.  And as we’ll see, it is a mistake to view this pessimism as a denial of the supply and demand model—something else it going on.

Consider the following two scenarios, presented to an average person:

A.  A firm faces much higher costs for an important ingredient to its product.

B.  A firm benefits from much lower costs for an important ingredient for its product.

In each case, what is the firm likely to do?  To an economist, nothing could be simpler.  Our models are symmetrical.  A profit-maximizing firm will have an incentive to raise prices in case A, and cut prices in case B.  (BTW, theory predicts these outcomes even if the firm is a monopoly.)

Over the course of my life, I’ve found that this is not how average people look at things.  It’s not a question of not being aware of supply and demand, they have asymmetric pessimism.  What are the causes of this pessimism?

1. Perhaps the asymmetric pessimism is true.  Maybe firms really would raise prices in case A, but not cut them in case B.  In any meaningful long run sense this is not the case.  But it is not impossible that consumers might have noticed a few real world examples of prices not being cut right away, due to nominal “price stickiness”.

2. In a generally inflationary environment, people might correctly notice prices rising much more often than they fall.  Economists are interested in relative prices, but the average person looks at nominal prices.  If a firm raises prices by 2% in a year of 4% CPI inflation, that’s a price cut to an economist and a price rise to an average person.

3.  Perhaps people are reluctant to sound naive, or pollyannish.  I’m hardly the first person to notice that pessimism is more intellectually fashionable than optimism.  People like Stephen Pinker are viewed as notable contrarians merely for pointing to a bunch of positive trends that every half way educated person should already know about.  The world is getting richer, healthier and safer?  What else is new?  But apparently he has become a controversial figure.

4.  The media mostly reports bad news.  So what is a voter to think when asked if some new government policy would fix some long standing problem?  Do they expect to wake up next year to newspapers reporting that our economic problems are now solved and that housing is now “affordable”?

5.  Equating greed with high prices.  Actually, firms that cut prices after input prices fall are being “greedy”.  But many people probably assume that the profit-maximizing option in that case is to not cut prices.  Because they’ve already decided that firms are greedy, they then reason backward to the conclusion that prices won’t be cut.

I suspect that people do believe that the laws of supply and demand apply to the housing market.  Ask them what will happen to apartment rents if a flood of immigrants pour into their town.  I suspect that they are answering a different question from what an economic pollster thought they were asking.  The pollster might think they’re asking, “Other things equal, how does more housing supply impact price?”  The public might respond as if asked “If this regulatory tweak happens, do I expected apartment rents to be lower a year from today?  

In my view, these poll questions are not particularly useful.  Instead, envision a country where one political party is opposed to building more housing and the other political party favors a massive push to increase the supply of new housing.  And also suppose that these policy views are widely known among the public.  Now ask a young voter about to graduate from college which party is likely to make housing more affordable.

We don’t need to speculate on that question.  A few months ago the British Conservatives campaigned on a somewhat Nimby platform, whereas Labour ran on a strongly Yimby platform.  Check out this survey from the recent election:

You might assume that this pattern is due to the fact that richer people vote Conservative.  But it’s not that simple:

In fairness, a portion of Conservative voters were retirees with modest incomes, who may have been more affluent when younger.

 

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