For Sale, By the Owner's Ego
Saturday, November 4, 2006
Sam LeBlanc tried to cushion the blow when he gave his wife, Karyn, the bad news. He told her to take a breath and think it over, because he knew that what he was telling her would hurt.
Her condominium isn't worth nearly as much as she thought.
"I was a little crushed," Karyn recalled.
People may think they make cold, hard decisions in financial transactions such as buying and selling a house. Increasingly, though, research shows that emotions play as big a role as intellect.
For Karyn, for example, the condo she bought in the District's Palisades neighborhood in 2002 was the first big, independent purchase she had ever made. She proudly added many special touches, including a closet organizing system she thought would be the envy of any woman. But she and Sam got married, had a baby and decided to sell the condo. Over the past few months, Sam did a lot of market research and decided they should ask $269,000.
The number came as a blow to Karyn, because she knew similar units, including some she thinks weren't as nice, sold last year for $280,000.
"You want to believe it's worth a lot more because you've invested your time and energy on it," Karyn said.
Evidence is mounting that people set prices, particularly for housing, as much on ego and self-image as on an objective review of the market. That's one reason for the phenomenon known as "sticky prices" -- home sellers who won't cut their demands enough to make a deal. It helps explain why the unsold inventory of homes has risen so high, and why, despite this rise, home prices in the Washington area have fallen only slightly. There were 24,741 homes for sale in September in Washington and the close-in suburbs, up from 13,950 a year earlier.
Economic researchers have found that emotions are a bigger influence than was previously believed in how people make financial decisions. For a long time, economists believed that human beings made decisions like robots, that people applied simple logic in making financial choices. But a body of research developed over the past two decades, known as neuroeconomics or behavioral economics, has shed light on how powerful a role the unconscious mind plays. New imaging technology, meanwhile, is allowing scientists to peer inside people's brains while they wrestle with financial decisions.
These studies have illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today.
In other words, people will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that [if they sell now] the market will rebound and they will feel like fools.
"There's a whole emotional processing system that goes on in the brain that's largely beyond our control," said Kevin McCabe, a professor of economics, law and neuroscience at George Mason University. "The general view is that our emotions control us, and not vice versa."