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Researchers Apply Mimetic Herding Theory to Behavior Involving Housing Mortgage Defaults

The theory of mimetics has been described as a biological predisposition to learn through the emulation of observed behavior.

Two Old Dominion University researchers have conducted a study that demonstrates that this form of mimicry is a potential risk to the fragile housing and mortgage market.

ODU's Michael Seiler, professor and Robert M. Stanton Chair of real estate and economic development, and Mark Lane, associate professor of real estate, together with David Harrison, Rawls Associate Professor of finance at Texas Tech University, will present their findings for the Real Estate Finance and Investment Symposium, Aug. 24-26, at the European Property Research Institute in Maastricht, Netherlands.

"The crowd has a powerful effect on human behavior. We were curious about the effect a neighbor walking away from a mortgage they can afford to pay would have on a 'typical' homeowner," Seiler said.

Babies mimic the facial expressions of adults far before they know why. Children pick up the accent of the region where they grow up. Teenagers parrot the behavior and colloquialisms of their peers. This type of social learning through imitation, known as mimetic herding, is one of the earliest forms of learning, and never leaves us.

Since mimetic behavior is conducted on a subconscious level, people are unaware, and often do not believe, they can be readily influenced by simply observing the behavior of others.

The Romans knew this, and planted mourners to sob at official funerals. Comedians use mimetic herding by planting people in the audience who'll laugh extra hard at their jokes to encourage others to follow suit.

And now this mimetic herding theory has been applied to the study of strategic defaults in the housing mortgage marketplace. In March 2011, the three researchers did an online experiment with nearly 1,500 homeowners, to see what role "herd mentality" plays in the likelihood of homeowners who can afford their mortgage, but who walk away from it anyway.

Seiler has studied the so-called "contagion effect" - the impact that a single default has on surrounding homeowners and, in effect, the entire mortgage marketplace. The three professors' latest study furthers that research by attempting to predict behaviors based on known theories of social clustering.

The new study demonstrates that homeowners' behavior is altered significantly by observing the behavior of their peers, especially if a particular peer is considered a maven, or real estate expert. The damage from cascading strategic defaults caused by mimetic herding can be stemmed somewhat if the homeowner has his or her own strong moral objection to strategic default, the research shows.

ODU's Center for Real Estate and Economic Development (CREED), in the College of Business and Public Administration, provided funding for the study.

In addition to being presented at the Real Estate Finance and Investment Symposium, the study has been submitted for publication in the Journal of Real Estate Finance and Economics.

Numerous studies have argued the increase in strategic defaults is a major contributor to the foreclosure epidemic and resulting stalled economy. Seiler's own research posits that, for the sake of the economy, it would be less harmful to push through foreclosures more rapidly, so that homes don't sit in limbo and are able to be resold to new buyers.

"In situations where an individual believes the group possesses a collective information advantage, the person will follow the herd in the hope of obtaining the group's superior information," Seiler said. "At other times, an individual will follow the herd in order to fill a subconscious need to fit into a greater social network."

In the researchers' study, participants were told to assume they had purchased a home at a price of $300,000, making a down payment of $30,000 while taking out a fixed rate mortgage. Now, four years later, the home has dropped in value to one of nine different levels, leaving the home underwater to varying degrees.

The study examines mimetic herding in an experimental setting to measure whether it is possible to change homeowners' stated willingness to strategically default at varying levels of negative equity. By falsely reporting the average willingness of their peers to strategically default, participants significantly deviated from their prior positions.

Consistent with theoretical expectations, even real estate professionals significantly herd after observing the behavior of their peers.

This article was posted on: August 2, 2011

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