All my years in real estate and a term exists I have not heard. Many sellers are afflicted. The term is Endowment Effect. Google endowment effect and you get a list of many research papers on this subject.
A behavioral economics term defined by Richard Thaler, Cornell University, the endowment effect is where people often demand much more to sell an object than they would be willing to pay to buy it.
Let’s think about that for just a minute. People often demand much more to sell an object than they would pay to buy it.
This reading brought on an acute moment of clarity for me – here is much of my real estate career defined by a term I did not even know existed!
Most of us believe we are rational decision makers. Many believe strongly that those rational decisions are “data driven.” But data is only information. It is the interpretation of data which leads us to conclusions; and as the endowment effect research indicates, such interpretations are substantially subjective. Otherwise how could we explain the different conclusions economists (or for that matter appraisers) arrive at when analyzing our economy (or the value of our homes). Because of our own desires and beliefs, we skew data interpretation towards the conclusions we prefer.
Those of us who work in real estate have seen this phenomenon in action over and over.
There are benefits for everyone in understanding the endowment effect. It should help buyers and sellers arrive at a realistic value. Buyers are extremely knowledgeable in today’s market. And buyers do speak when it comes to value. Enough time on the market, buyers speak even in their silence, and what the market will bear becomes apparent. In the end ……. all that matters is what a buyer is willing to pay. The endowment effect reminds us that we are all only rational and data driven within limits and it is healthy to remember what those limits are.
This is a great video that helps us understand the endowment effect.
Sources: Thaler, Nofsinger, Fredrick Peters
Chris Stewart, SRES is a Real Estate Broker with Windermere Pacific West Properties in Salem, Oregon. One of her specialties is working with boomers and seniors over 55 who are downsizing, changing lifestyle, moving into retirement, or moving into assisted living. She is an active book club member and former Team Oregon Instructor.
