Real Estate and The Endowment Effect

Real Estate Terms by Pleasant Valley Real EstateAs a real estate agent I spend a lot of time in my car or in my office, Pleasant Valley Real Estate, in Underhill, Vermont. The other day while at work I was listening to National Public Radio and my ears perked up when I heard this sentence: “Sellers often believe the things they want to sell are worth much more than the market is willing to pay.”

“Whoa,” I thought. “I see that all the time in real estate!”

The commentator was social science correspondent Shankar Vendatum, who went on to describe how people often demand much more to give up an object than they would be willing to pay for it. As an example he consulted psychologist Dr. Tom Walston of the University of Maryland, who sees this firsthand in his own neighborhood.

“The house across the street from us has been on the market for months now. No doubt it would sell if they lowered the price some. So these are people who feel their house is worth more than anyone is willing to pay for it,” Walston said.

This commentary was hitting really close to home! I usually experience this very same thing when I first begin working with people who have decided to sell their homes. They inevitably want a higher price than what I recommend, which is always the fair market price. Even though I have nearly 30 years experience in real estate, they believe their houses are worth much more than my recommendation. And even though I have exhaustively researched the value of their homes, they still insist they can get a higher price.

Commentator Vendatum went on to explain that there is a name for this condition. It’s called “the endowment effect,” which is the phenomenon in which most people demand a considerably higher price for a product that they own than they would be prepared to pay for it. The endowment effect is likely handed down to us by evolution, since it is visible cross-culturally as well as in non-human primates.

Simply put, the endowment effect says that once you own something you start to place a higher value on it than others would.

I was happy to get a reasonable explanation for the baffling behavior of the sellers I have worked with over the years. I have found it frustrating that sellers don’t respect my experience or professional opinion, but now I know it’s just a matter of human nature. People truly believe they can get a higher price for their home than the listing price I recommend. Ultimately, if people are truly motivated to sell their houses, they eventually come down in price. But meanwhile we’ve wasted a bit of time. I guess it’s just the nature of my business.

Next time a seller wants to ask much more that the price I recommend, I’m going to suggest he or she listen to the podcast by Shankar Vendatum. It’s called “Are We Genetically Inclined To Be Materialistic?” Here’s the link in case you’d like to listen to it yourself:

http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=257394308&m=257394309

Thanks for reading my blog. If you want to put your house on the market, give me a call at 802-858-9193, find me on Facebook, or send me an email, but be prepared for a reality check!

Lea Van Winkle, Owner/Broker

Pleasant Valley Real Estate

Posted in Pleasant Valley News, Rural Vermont Real Estate.