Final answer:
Spending more on remodeling than the added value to the house represents the economic principle of diminishing returns. Behavioral economists explain that people tend to judge financial outcomes like these in terms of relative gains and losses rather than absolute values.
Step-by-step explanation:
Spending $10,000 to remodel your bathroom and finding that it only added $5,000 to the overall value of your house is an example of the economic principle of diminishing returns. This principle explains that after a certain point, each additional dollar spent will yield less and less in added value. In this case, the investment in the bathroom remodel did not correspond to an equal increase in property value.
Behavioral economics would interpret this situation as a contradiction to mainstream economic thought, which might suggest that rational decision-making involves evaluating gains and losses based on actual value rather than perceived value. Behavioral economists point out that in decisions like these, people often consider the proportion of the gain or loss relative to the original amount, which affects their financial decisions. This is relevant to the way people judge the outcomes of their investments in terms of gains and losses as percentages rather than as direct financial benefits.