If you’re in the process of selling your current apartment and upgrading to purchase a larger one, make sure you look at the bigger picture. We have spoken with many sellers who are looking at the process too myopically by overweighting the outcome of the sale. Particularly those sellers who are offloading their property at a loss, they tend to be stuck in the “loss aversion” mindset which, by the way, is always stronger than the “attraction to the gain” mindset.
Quoting from Wikipedia: “In prospect theory, loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains. This leads to risk aversion when people evaluate a possible gain; since people prefer avoiding losses to making gains … Conversely people strongly prefer risks that might possibly mitigate a loss (called risk seeking behavior). Loss aversion implies that one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall. Note that whether a transaction is framed as a loss or as a gain is very important to this calculation: would you rather get a $5 discount, or avoid a $5 surcharge? The same change in price framed differently has a significant effect on consumer behavior.”
In today’s market, the upgrade trade makes sense to us because lower priced properties have fallen less in price and are in greater demand than those higher-end properties, making the net result a wash, at the very least. While intellectually this makes sense for most people, those mindsets tend to take over in the short-term, rendering sellers more attached to the outcome of the sale than recognizing the opportunity on the purchase. If you are in this situation, keep your eye on the longer term goal (i.e. the “gain” in the situation) and your fundamental reasons for upgrading in the first place.
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Good point! Also, the loss aversion folks seem to overlook the relatively small loss in absolute dollars as opposed to the huge gain from buying bigger–at reduced prices–in a slow market.