The Endowment Effect

In a real estate transaction the stakes are usually high, whether it’s economic or emotional.   For purchasers it may be the stress of making a purchase many times larger than every other kind of purchase that they have ever made or will make again. For a seller, they are selling what may be the most emotional object to which people ever become attached, their home. Either way, it’s a most emotional topic and you can expect that people won’t be rational about it. Even though the mechanics of a real estate deal are pretty cut and dried, when people are involved, the problems surface. When people are in negotiations, their honor seems to be at stake. Many transactions have been lost because someone felt insulted about something that has almost nothing to do with the economics of the deal.

For some reason, people who own a house think it’s worth more than the people who are trying to buy it. This dilemma or effect happens over and over again. Research shows that people truly believe a property is worth more if they are selling it and less if they are the buyer.   In other words, the pleasure of gaining something seems smaller than the displeasure of losing the exact same thing. Once you’ve owned something its value increases and deep in the hearts of the seller, they really believe the house or property they own is worth far more than the buyer is willing to pay. In psychology, this is called The Endowment Effect.

So who is right, the buyer or the seller? As an agent it is sometimes very tempting to tell the client to “get real”, but that kind of talk would more than likely fall on deaf ears. Usually this emotional and economical tug-of-war works its way out, with both getting essentially what they needed out of the deal. That does not mean that some grumbling after the fact doesn’t reach the ears of their agent/negotiator, but… when the dust finally settles, buyer and seller usually realize that they got what they wanted. Once the buyer stops comparing the property to another, they realize that they got the property and that is what they really wanted. Once the seller is out of the property, their “home”, some of that emotion drifts away and they are free to create a new endowment!