Two homeowners, with identical houses, will list the houses at different prices, depending on what they paid for the house because of what psychologists call "loss aversion." Unfortunately for these loss-averse sellers, buyers don't suffer from similar delusions,
If homeowners know they have this bias, why don't they buy house price insurance against a drop in value? Maybe they dont even know.
Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.
Sunk-cost fallacy is present in the commercial side as well. One client of ours (a publicly traded REIT) will not sell a vacant building for less than they purchased it. The property is in a declining office submarket and has sat vacant for several years. Rather than declaring a loss at the time of sale, they continue to let it languish on the books for an inflated Book Value.
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