Inflated prices: how to vaccinate the market against the price virus

When valuation collides with human subjectivity, real estate sellers may tend to overestimate the value of their property. Real estate professionals, invite them to change their point of view and opt for the strategy of considering the opposite.

The price virus refers to a situation where the seller’s perception of the value of a property exceeds the objective value of the property. How to understand the owner value illusions and how to destroy them?

The imagined value or the illusion of the right price

Individuals’ decision-making processes do not strictly obey rational logic. Indeed, our cognitive biases and emotions shape our perception of reality, often without our knowledge. These “cognitive distortions” lead us to make reasoning errors that can significantly alter the value we attribute to a good. It is these biases that push the seller to an unrealistic valuation.

Among these, theso-called endowment effect plays a key role. According to behavioral economists, the ownership of real estate makes us value it more than if we did not have it (1). This effect, reinforced by theemotional attachment to property and coupled with our loss aversion poses a particularly acute dilemma when it comes to setting or readjusting the selling price in a crisis market.

Sellers, anchored in a favorable past evaluation (anchoring bias), struggle to accept that this evaluation no longer corresponds to the current reality of the market. This price adjustment is perceived as the materialization of a loss — a more psychologically painful prospect than not selling (loss aversion bias) (2).

As a result, many sellers are willing to tolerate a longer period on the market in order to find a buyer who will accept their price. Relying on unrealistic expectations (optimism bias), largely supported by confirmation bias, they maintain the hope that a buyer will discern the unique value and characteristics they attribute to their property and agree to pay the asking price.

Pride and Greed: The Deadly Sins of Real Estate Valuation

These behaviors are only elements of a deeper debate, where the personality of the sellers has a considerable influence. It is particularly interesting to note that the resistance to price adjustments or recommendations is often more pronounced in salespeople characterized by an oversized ego.

As Belk(3) points out, a home transcends its mere material value to become an extension of the owner’s identity, a means of expressing who he or she is. High self-esteem leads some individuals to overvalue their abilities, accomplishments, or possessions, in this case their home, believing in its uniqueness and exceptional qualities. This belief in the singularity of their property leads to setting a price well above market norms.
And this is all the more so since the potential hubris of the selling owner makes him blind to market realities and completely impervious to outside advice. Finally, greed, often exacerbated by financial pressures, acts as another driver that leads sellers to set a price too high(4).

Combating bias by considering the opposite

As you can see, asking the seller to listen to reason with supporting evidence doesn’t work! Combating cognitive biases seems to be a losing battle. However, hope is not lost: a series of recent studies indicate that targeted cognitive debiasing strategies could actually help
their fruits.
The so-called “alternatives” method is an approach in which individuals are specifically encouraged to consider scenarios, information, or perspectives that contradict their current beliefs or expectations. Its effectiveness is related to the way it forces individuals to actively engage with information or perspectives that they might otherwise ignore or minimize. This leads them to reevaluate
the basis of their initial beliefs or judgments (6). This debiasing is structured around two facets.

The first is to get your salesperson thinking about opposing perspectives.

• Ask sellers what information they base their evaluation on, how this information is relevant to evaluate the price and what alternative information they might retain helps break away from the initial anchor and confirmation bias.
• Encourage sellers to consider their home from the perspective of a potential buyer can help them identify and eliminate overvaluation elements based on personal preferences.
• Invite your sellers to estimate the value of different properties. By arranging viewings for these properties and asking them what price they would acquire them for, and then comparing these estimates with the price they want for their own property, you will get them to recognize the impact of the endowment effect.

The second facet is to make a different price more salient and relevant.

• Real estate auctions can encourage people to think about alternative scenarios where their property might go. sell at a lower price than their initial expectation.
• Presenting concrete cases that highlight the impact of a price gap in relation to its market value on the sales period could also bear fruit.

We will remember

The strategy of considering the opposite emerges as a powerful tool to counteract these biases. This approach can lead to a more balanced estimate and an opening towards a more constructive dialogue with sellers.
It’s important to show that you’re listening to their concerns and willing to support them through the process. Receiving a review that’s lower than the customer’s expectations is bad news.

However, it should be noted that empathetic and educational communication is important.

1) Mwanyepedza, R., & Mishi, S. (2024). Endowment effect, information asymmetry, and real estate market decisions: willingness to pay and willingness to accept disparities. Real Estate Management and Valuation, 32(1), 37-48.
2) Leung, T. C., & Tsang, K. P. (2013). Can anchoring and loss aversion explain the predictability of
housing prices?. Pacific Economic Review, 18(1), 41-59. Bucchianeri, G. W., & Minson, J. A.
(2013). A homeowner’s dilemma: Anchoring in residential real estate transactions. Journal of Economic Behavior & Organization, 89, 76-92.

3) Belk, R. W. (1989). Extended self and extending paradigmatic perspective. Journal of consumer research, 16(1), 129-132.
4) Ibid 2.
5) Lord, C. G., Lepper, M. R., & Preston, E. (1984). Considering the opposite: a corrective strategy for social judgment. Journal of personality and social psychology, 47(6), 1231.

6) Schweickart, O., Tam, C., & Brown, N. R. (2021). When “bad” is good: How evaluative judgments eliminate the standard anchoring effect. Canadian Journal of Experimental Psychology/Revue canadienne de psychologie expérimentale, 75(1), 56.

Nathalie Gardes

Nathalie Gardes is a lecturer and researcher at the University of Bordeaux. She holds a doctorate and is qualified to supervise research.
She publishes in various scientific journals on strategic marketing.

Responsible for the professional license in real estate professions, option transaction and marketing of real estate at the IUT of Bordeaux, she teaches courses in real estate strategy and marketing.