Behavioral economics is the study of how social, cognitive and emotional factors influence the economic decisions of consumers, borrowers and investors, along with market prices, returns and the allocation of resources. It basically refutes efficient market theory and looks to human nature as an indicator of behavior.
We’re bringing this up because we came across this nifty graphic, courtesy of Butler and Philbreck, outlining the reasons why individual “investors regularly violate the basic rules of rational decision making – to their detriment.” In other words, what tends to trip you up in your decision-making?
If you’re stuck in your selling process, here are some questions that you may wish to ask yourself as a seller:
- Am I holding on to my “loss” too long (prospect theory)
- Am I, instead, considering pricing too low based on overweighing very recent deals? (availability error)
- Am I stuck on what the value of my home ought to be? (representativeness)
- Do I believe my agent doesn’t understand the situation? (halo effect)
- Am I losing sight of the bigger, macro picture? (myopic loss aversion)
- Have I consistently rejected others’ input because I believe I know better? (overconfidence)
The answers to these questions may well affirm that you are on the right path and just need a little patience for your strategy to work. If, however, you answered “yes” to many of these, take the opportunity to shift course and adjust for your all-too-human reactions.
{ 2 comments… read them below or add one }
I would change representativeness to ANCHORING and change the definition to: Am I anchored to what my apartment USED to be worth!
Yes – I found that one a bit odd too — I know the picture is not clear (it links to a much clearer version) … anchoring is technically part of Myopic Loss Aversion which includes, according to the model: lose sight of the big picture, focus on near term losses, anchor against most recent values, and underweight more aggressive investments.
Representativeness includes: great companies are great investments (translated to real estate: “buying a home is always a great investment”, people rely on rules of thumb, people see things the way they “ought to be”.