... Anyone shopping for a home should consult National Flood Insurance Program maps to understand what the estimated risk of flooding is for their property, protect themselves with flood insurance, and possibly even decide against buying a home at all if it’s located in a flood-prone area. Unfortunately, however, humans don’t always act rationally — and according to a forthcoming paper by economists Okmyung Bin and Craig E. Landry, they also tend to have extremely short memories when it comes to natural disasters.
Bin and Landry studied real estate prices in Pitt County, North Carolina before and in the aftermath of Hurricanes Fran and Floyd in 1996 and 1999, respectively. According to their research, prior to Hurricane Fran there was no differential in home prices between those in flood-prone areas and those outside — as there hadn’t been a significant flooding event in Pitt County since the 1950s. Immediately after Hurricane Fran, however, home prices inside the flood zones predictably fell in price, selling for 5% less on average than homes outside flood zones. After the particularly ruinous Hurricane Floyd, this price difference became an even-more-extreme 8%.
But what surprised Bin and Landry was that the differential evaporated completely by 2005, a mere six years after Floyd devastated much of Pitt County. In other words, it doesn’t take long for prospective home buyers to forget the dangers of living in flood-prone areas. According to Landry, “We were really surprised by this result. We expected to see a decay, but not to see it disappear completely.”
To explain their confounding results, Bin and Landry turned to a concept in behavioral economics called the “availability heuristic.” Basically, what this theory argues is that human beings are less able to judge the probability of an event occurring which they have not recently experienced themselves. A person who hasn’t lived through a flood will downplay the probability of his house getting flooded, and the same goes for someone who hasn’t experienced a flood very recently.