Tuesday, August 24, 2010
Sunk-cost fallacy in real estate
In the post below this one, we show that the housing market can have excess supply. This post shows that it is due to thereluctance of homeowners to sell at a loss, a version of the sunk cost fallacy.
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,
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,
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.
Note that this reluctance is similar to the reluctance of businesses to pull the plug.
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