Why My House Is Worth More To Me Than It Is To You
It’s spring. That means, at least where I live, many people are thinking about selling their house. And here’s where the fun begins; most of these people believe their house is “special” – above average and worth a premium.
Behavioral economists call this the endowment effect. Research indicates that people often value a thing more after they own it. And they will often demand much more when they sell it than they paid for it.
My house is worth more because it’s my house. So, if you want my house, you’d better be prepared to pay more than I paid for it. Maybe a lot more.
It seems the value we place for an object, say a house, changes after we buy it. The very fact that something is owned makes it more valuable. This means that a house is not just any old house, it’s your house. And you’re going to demand a premium to let someone buy your house. Think about the impact of this.
For the buyer:
You are not emotionally attached to the new house.
You do your best thinking-brain research to determine the “fair” market value of the listing.
You make an offer that you believe is in line with market conditions.
Your offer is not accepted.
For the seller:
- You are emotionally attached to your house.
- Every decision you take in biased by the endowment effect.
- You receive an offer that is in line with market conditions.
- You are “insulted” and reject the offer.
This behavior was one of the reasons its taken so long for the housing industry to recover from the 2008 crash. Everyone thought their house was worth more than their neighbor’s. No one wanted to sell for less than they thought it was worth, even if it made economic sense to sell.
The endowment effect can be an issue in all transactions – big and small. As a consumer, what can you to do? Consider this:
- Know that you have money biases that impact your spending decisions. We all do.
- The endowment effect is an unconscious behavioral bias that can be especially troublesome for major purchases and sales.
- Simply being aware of the endowment effect can help you avoid it.
- Force yourself to use your thinking, analytical brain in all major spending and selling decisions.
- Use a third party (agent, broker, lawyer, etc.) to keep your thinking brain engaged.
- Do your homework and trust the numbers; again hard thinking-brain stuff.
- Don’t forget the opportunity cost – the value of the next-highest-valued alternative use of your time and money. Sometimes cutting your losses makes sense.
The Chief Command Pilot – Ted