Recently on Behavioral Economics

It always amazed me how when you meet with a prospective seller, they feel that their property is worth multitudes more than the comparables.

Often, it comes down to how they have a hot tub, and their neighbor does not. They just re-did the flooring - themselves - and their neighbors didn't. All this, compounded with their personal history and memories of the property inflate the price artificially.

I'll never forget a property that Sheila and I were looking at where the seller had done some work to the property before selling it, raised the price, and when it didn't sell, they sunk more money into the property, raised the price again to cover their costs, and were once again surprised that it didn't sell. They continued to do this, until they had built an in-law suite on top of the garage, put in another dining room behind the garage, added a hot tub, added a second story and more.

Interestingly, one of the least appealing attributes of the house was that it was sideways on the lot, facing the driveway on the side. The side of the house that faced the street had no windows and was just two stories of siding and a roof line.

So why is it that a sellers demand a king's ransom for their property?

I recently started reading Robert B. Cialdini's "Influence: The Psychology of Persuasion" and was struck by an interesting study in the first chapter.

Harvard social psychologist Ellen Langer conducted a study based on the seemingly built in human response to respond to a favor better when there's a good reason to fulfill the request.

In her study, someone would approach a line of people waiting to use the copier at the library and ask to make copies.

In the first group, the person would say: "Excuse me, I have five pages. May I use the Xerox machine because I'm in a rush?" An overwhelming large number of people responded favorably (94%) and allowed the person to skip ahead in line.

In the second group, the reason was dropped and the question was changed to: "Excuse me, I have five pages. May I use the Xerox machine?" In this situation, the positive response dropped significantly to only 60% of those in line letting the person skip ahead.

And, just to test to how important the actual reason was, a third test was conducted, this time again with a reason, but... a useless reason. The reason was a restatement of the obvious: "Excuse me, I have five pages. May I use the Xerox machine because I need to make copies?"

Adding a reason, even though it's an obvious and unnecessary to state reason, brought the positive response back up, this time to 93%.

How can this study can help us real estate investors and marketers?

It can help in two very effective and useful ways.