3 traps we make when selling a flat

Behavioural economics helps us to understand the behaviour of sellers in relation to their price expectations and the difficulties faced by property advisors.

The behavioural finance and the behavioural economicsthose "close fields that apply scientific research into human and social cognitive and emotional tendencies for a better understanding of economic decision-making [...]", offer a good explanation of the behaviour of selling homeowners in relation to their expectations of selling price, as well as the difficulties faced by real estate consultants in making objective and well-founded arguments to their clients (selling homeowners) about the value of a property and its most likely transaction price.

Taking as a reference the studies of Daniel Kahneman published in his latest book Think fast think slowI have identified three phenomena (effects) that condition - unconsciously! - the decisions of flat sellers and often prevent them from acting rationally and maximising the profit from a sale. These are: Anchor effect, endowment effect and illusion of validity.

Anchor effect

The anchor effect refers to the unconscious tendency of people to be influenced by irrelevant numbers. and which Daniel Kahneman and Amos Tversky demonstrated with several experiments, including one using a rigged wheel of fortune (only the numbers 10 and 65 were shown) and asking the experiment subjects about the percentage of African nations belonging to the UN. Those who got the number 10 on the wheel subsequently estimated on average that 25% of African nations belonged to the UN, while those who got 65 estimated, on average, 45% in response to the same question.

This is like saying that the 7-1 result of a Barça-Alavés match can condition the price at which a Culé decides to put his flat up for sale if he makes the decision in a relatively short time after the match.

This being the case, it is easy to understand how market exit prices are conditioned by news about house price rises.The price at which the neighbour in the attic has his flat for sale or the first exorbitant price that crosses the mind of the owner's dentist nephew when he tells him that he is putting his flat up for sale at Christmas Eve dinner. We are nothing...

The endowment effect

The endowment effect is based on differentiating between those goods that people consider "to be exchanged" and those goods destined for "use".

When a trader sells a good and receives the money in exchange, he does not feel a sense of loss because he understands that good as equivalent to the money he receives for it. Similarly, the buyer of the good understands that the money he pays is the money he had earmarked for the good, so for both parties the equation is the same: Good = X euros.

Is it the same for the sale of a house? Not at all.

As a general rule, the selling homeowner will want to receive more money for his home than he would pay, as a buyer, for an identical home. The reason for this can be explained by a combination of several factors associated with the endowment effect:

1. Loss aversion: The pain of giving something up weighs more heavily than the pleasure of getting it.
2. The reference price at which the property was purchased: For two identical properties for sale but purchased at different times, the owners who have bought more expensive intend to sell more expensive, which is irrational given that both know that the price of a property in a market is indifferent to the cost of its acquisition in the past.
3. The propensity to monetise the "emotional damage" involved in disposing of an asset with which there is a strong emotional attachment, i.e. perceiving the sale price of a home as its value plus the emotional cost of its loss. (This is my own hypothesis).

As a general rule, the selling homeowner will want to receive more money for his home than he would pay, as a buyer, for an identical home. 

Illusion of validity

The illusion of validity is a cognitive bias whereby people rely - often wrongly - on their own judgement. This is especially the case when this judgement is based on the analysis of a set of data that satisfies a pattern, for example: celebrities are often thought to divorce more frequently than ordinary people. This is because the celebrity divorces are systematically reported in the tabloids, but not by the anonymous couple. The celebrities who get divorced are well known, but hardly ever (unless it is news, and it rarely is) those who stay together for a long time.

Part of the reason this happens is because of what Kahneman calls WYSIATIacronym for What you see is all there iswhich, simplified and translated, means "that we tend to give answers based solely and exclusively on the information we have at hand, without taking into account that data we do not know about could substantially change our analysis. What you see is all there is, or there is no more than what you see".

The real estate version of this phenomenon appears every time an owner sets a price for his property based on an analysis of the offer price of similar properties in his area without knowing at what price these properties are actually traded or what surrounding factors are being overlooked (building, parking space, community services, year of refurbishment, state of the installations, months on the market, etc.). He is acting under the WYSIATI effect and although he does not have complete information to make a well-founded judgement - to put an appropriate price - he takes it as valid.

Conclusion for private sellers

The private sellers are particularly vulnerable to these three effects. All of them affect their decision even if they do not know it. If these sellers come into contact with a real estate consultant who wants to help them, their sense of certainty is so high that it is difficult or impossible for them to change their mind, even if it is based on an erroneous judgement. If you want a good starting point, we can give you a free valuation of your property, without obligation, reasoned and without generating false expectations. Request it free of charge here.

Conclusion for real estate professionals

Professionals are not immune to these phenomena and particularly to the illusion of validity, which often affects people who are experts in their field and who rely excessively on their professional intuition.

Similarly, to help homeowners who have been contacted after a failed sales experience, it is important for agents to be aware of these three effects - anchor effect, endowment effect and illusion of validity - in order to "pull them out" of their pit of false beliefs and guide them towards a more objective judgement that maximises their chances of success.